SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------------------
FORM 6-K
Report of Foreign Private Issuer
Pursuant to Rule 13a-16 or 15d-16
of the Securities Exchange Act of 1934
For the Month of March 2006
-----------------------
ELBIT SYSTEMS LTD.
(Translation of Registrant's Name into English)
Advanced Technology Center, P.O.B. 539, Haifa 31053, Israel
(Address of Principal Corporate Offices)
Indicate by check mark whether the registrant files or will file annual reports
under cover of Form 20-F or Form 40-F:
|X| Form 20-F |_| Form 40-F
Indicate by check mark if the registrant is submitting the Form 6-K in paper as
permitted by Regulation S-T Rule 101(b)(1): |_|
Note: Regulation S-T Rule 101(b)(1) only permits the submission in paper of a
Form 6-K if submitted solely to provide an attached annual report to security
holders.
Indicate by check mark if the registrant is submitting the Form 6-K in paper as
permitted by Regulation S-T Rule 101(b)(7): |_|
Note: Regulation S-T Rule 101(b)(7) only permits the submission in paper of a
Form 6-K submitted to furnish a report or other document that the registrant
foreign private issuer must furnish and make public under the laws of the
jurisdiction in which the registrant is incorporated, domiciled or legally
organized (the registrant's "home country"), or under the rules of the home
country exchange on which the registrant's securities are traded, as long as the
report or other document is not a press release, is not required to be and has
not been distributed to the registrant's security holders, and, if discussing a
material event, has already been the subject of a Form 6-K submission or other
Commission filing on EDGAR.
Indicate by check mark whether the registrant by furnishing the information
contained in this form is also thereby furnishing the information to the
Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act of 1934:
|_| Yes |X| No
If "Yes" is marked, indicate below the file number assigned to the registrant in
connection with Rule 12g3-2(b): 82-______________
Attached hereto as Exhibit 1 and incorporated herein by reference is
the Registrant's press release, dated March 15, 2006.
Attached hereto as Exhibit 2 and incorporated herein by reference is
the Registrant's Management Report with respect to the results of operations of
the Registrant for the year ended December 31, 2005.
Attached hereto as Exhibit 3 and incorporated herein by reference is
the Registrant's consolidated audited financial statements for the year ended
December 31, 2005.
SIGNATURE
---------
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
ELBIT SYSTEMS LTD.
(Registrant)
By: /s/ Ilan Pacholder
---------------------------------
Name: Ilan Pacholder
Title: Corporate Secretary
Dated: March 15, 2006
EXHIBIT INDEX
-------------
Exhibit No. Description
----------- -----------
1. Press release dated March 15, 2006
2. Management's Report.
3. Financial Statements
EXHIBIT 1
EARNINGS RELEASE
ELBIT SYSTEMS REPORTS FOURTH QUARTER
AND FULL YEAR RESULTS FOR 2005
RECORD REVENUES, ORDER BACKLOG AND OPERATING CASH FLOW
o 55% INCREASE IN BACKLOG OF ORDERS TO $3.35 BILLION
o 13.8% INCREASE IN ANNUAL CONSOLIDATED REVENUES TO $1.07 BILLION
o $187.6 MILLION IN OPERATING CASH FLOW
HAIFA, ISRAEL, MARCH 15, 2005 - ELBIT SYSTEMS LTD. (THE "COMPANY") (NASDAQ:
ESLT), the international defense electronics company, today reported its
consolidated results for the fourth quarter and year-ended December 31, 2005.
THE COMPANY'S BACKLOG OF ORDERS AS OF DECEMBER 31, 2005 reached $3.35 billion,
as compared to $2.15 billion at the end of 2004. 72% of the backlog relates to
orders outside of Israel. Approximately 65% of the Company's backlog as of
December 31, 2005 is scheduled to be performed during 2006 and 2007.
CONSOLIDATED REVENUES FOR THE YEAR ENDED DECEMBER 31, 2005 increased by 13.8% to
$1,070 million, as compared to $940 million in 2004.
CONSOLIDATED REVENUES FOR THE FOURTH QUARTER OF 2004 increased by 18.8% to
$321.8 million, as compared to $270.8 million in the corresponding quarter of
2004.
IMPACT ON 2005 RESULTS. As previously reported, the Company's 2005 financial
results were expected to be effected by the acquisition of 40% of the shares of
Tadiran Communications Ltd. ("Tadiran"), which were purchased in several stages
in the fourth quarter of 2004 and during 2005, and by the purchase of 70% of the
shares of Elisra Electronic Systems Ltd. ("Elisra") in the fourth quarter of
2005. As a result of the above purchases the Company recorded one-time
In-Process R&D ("IPR&D") and one-time write-offs related to the acquisitions.
The effects of the Tadiran transactions are recorded as part of the Company's
earnings from affiliated companies in its income statement. In addition, the
Company's net earnings were affected by $5.4 million of value impairment
recorded with respect to its holdings in ImageSat International N.V. ("ISI"),
which is included in the Company's other expenses.
REPORTED CONSOLIDATED NET EARNINGS FOR THE YEAR ENDED DECEMBER 31, 2005 were
$32.5 million, as compared to $51.9 million in 2004. Reported diluted earnings
per share ("EPS") in 2005 were $0.78, as compared to $1.26 in 2004.
Excluding one-time IPR&D and other one-time expenses and write-offs related to
the purchase of the Tadiran and Elisra shares, the Company's net income in 2005
was $51.1 million, and the diluted EPS was $1.23, as compared to net income of
$52.9 million and diluted EPS of $1.29 in 2004.
REPORTED CONSOLIDATED NET LOSS FOR THE FOURTH QUARTER OF 2005 was $5.7 million,
as compared to net income of $13 million in the same period of 2004. Reported
diluted EPS for the fourth quarter of 2005 was $(0.14), as compared to $0.31 for
the fourth quarter of 2004.
Excluding one-time IPR&D and other one-time expenses and write-offs related to
the purchase of the Tadiran and Elisra shares, the Company's net income in the
fourth quarter of 2005 was $7.6 million, and the diluted EPS was $0.18.
GROSS PROFIT FOR THE YEAR ENDED DECEMBER 31, 2005 was $279.8 million, as
compared to gross profit of $250.3 million in 2004, and the gross profit margin
in 2005 was 26.1%, as compared to 26.6% in 2004.
Excluding one-time restructuring expenses related to the purchase of Elisra, the
Company's gross profit in 2005 was $283.3 million, and the gross profit margin
was 26.5%.
GROSS PROFIT FOR THE FOURTH QUARTER OF 2005 was $78.5 million, as compared to
gross profit of $72.6 million in the fourth quarter of 2004, and the gross
profit margin in the fourth quarter of 2005 was 24.4%, as compared to 26.8% in
the fourth quarter of 2004.
Excluding one-time restructuring expenses related to the purchase of Elisra, the
Company's gross profit in the fourth quarter of 2005 was $81.9 million, and the
gross profit margin was 25.5%.
OPERATING CASH FLOW produced by the Company in 2005 was $187.6 million, as
compared to $81.5 in 2004.
The President and CEO of Elbit Systems, Joseph Ackerman, commented: "2005 was a
very significant year for the Elbit Systems Group, both operationally and
strategically. Operationally we achieved unprecedented growth in revenues,
backlog of orders and cash flow. On the strategic level we completed the
acquisitions of controlling interests in both Elisra and Tadiran Communications,
creating the largest defense group in Israel. These important complementary
additions to our Group enable us to expand even further our portfolio of
advanced defense electronics systems and solutions for our customers worldwide,
enhancing our competitive position in the international market. The process of
implementing the new synergies within the Group companies has already begun, and
we believe both acquisitions will be accretive. We intend to continue to invest
in the development of new technologies and markets and to execute our long-term
plan of profitable organic growth, while pursuing our acquisition strategy in
Israel and globally."
The Board of Directors has declared a dividend of $0.14 per share for the fourth
quarter of 2005. The dividend will be paid on April 10, 2006, net of taxes and
levies, at the rate of 22.1%. The record date of the dividend is March 28, 2006.
CONFERENCE CALL
The Company will be hosting a conference call on Wednesday, March 15, at 10.00am
EST.
To participate, please call one of the following teleconferencing numbers.
Please begin placing your calls at least 5 minutes before the conference call
commences. If you are unable to connect using the toll-free numbers, please try
the international dial-in number.
US DIAL-IN NUMBERS: 1 866 744 5399
UK DIAL-IN NUMBER: 0 800 917 5108
ISRAEL DIAL-IN NUMBER: 03 918 0609
INTERNATIONAL DIAL-IN NUMBER: +972 3 918 0609
AT:
10:00AM EASTERN STANDARD TIME
7:00AM PACIFIC STANDARD TIME
3:00PM GREENWICH MEAN TIME
5:00PM ISRAEL TIME
This call will be broadcast live on Elbit Systems' web-site at
HTTP://WWW.ELBITSYSTEMS.COM. An online replay will be available from 24 hours
after the call ends, and will be available online for 30 days.
Alternatively, for two days following the end of the call, investors will be
able to dial a replay number to listen to the call. The dial-in number is
either: 1 888 269 0005 (US) 0 800 917 4256 (UK) or +972 3 925 5945 (Israel and
International).
ABOUT ELBIT SYSTEMS LTD.
Elbit Systems Ltd. is an international defense electronics company engaged in a
wide range of defense-related programs throughout the world. The Elbit Systems
Group, which includes the company and its subsidiaries, operates in the areas of
aerospace, land and naval systems, command, control, communications, computers,
intelligence, surveillance and reconnaissance ("C4ISR"), advanced electro-optic
and space technologies, EW suites, airborne warning systems, ELINT systems, data
links and military communications systems and equipment. The Group also focuses
on the upgrading of existing military platforms and developing new technologies
for defense and homeland security applications.
COMPANY CONTACT: IR CONTACT:
Ilan Pacholder Ehud Helft / Kenny Green
V.P. Finance & Capital Markets
Corporate Secretary
Elbit Systems Ltd. Gelbart Kahana
Tel: +972-4 831-6632 Tel: 1-866-704-6710
Fax: +972-4 831-6659 Fax: + 972 - 3 - 607 - 4711
E-mail: pacholder@elbit.co.il E-mail: KENNY@GK-BIZ.COM
E-mail: EHUD@GK-BIZ.COM
STATEMENTS IN THIS PRESS RELEASE WHICH ARE NOT HISTORICAL DATA ARE
FORWARD-LOOKING STATEMENTS WHICH INVOLVE KNOWN AND UNKNOWN RISKS, UNCERTAINTIES
OR OTHER FACTORS NOT UNDER THE COMPANY'S CONTROL, WHICH MAY CAUSE ACTUAL
RESULTS, PERFORMANCE OR ACHIEVEMENTS OF THE COMPANY TO BE MATERIALLY DIFFERENT
FROM THE RESULTS, PERFORMANCE OR OTHER EXPECTATIONS IMPLIED BY THESE
FORWARD-LOOKING STATEMENTS. THESE FACTORS INCLUDE, BUT ARE NOT LIMITED TO, THOSE
DETAILED IN THE COMPANY'S PERIODIC FILINGS WITH THE SECURITIES AND EXCHANGE
COMMISSION.
(FINANCIAL TABLES TO FOLLOW)
ELBIT SYSTEMS LTD.
CONSOLIDATED BALANCE SHEETS
(In thousand of US Dollars)
December 31 December 31
2005 2004*
----------- -----------
Audited Audited
ASSETS
------
Current Assets:
Cash and short term deposits 94,629 34,847
Trade receivable and others 416,067 266,610
Inventories, net of advances 328,428 248,041
----------- -----------
Total current assets 839,124 549,498
Affiliated Companies & other Investments 201,339 59,618
Long-term receivables & others 151,557 85,100
Fixed Assets, net 284,997 244,288
Other assets, net 142,728 95,987
----------- -----------
1,619,745 1,034,491
=========== ===========
LIABILITIES AND SHAREHOLDER'S EQUITY
------------------------------------
Current liabilities 612,168 376,157
Long-term liabilities 543,893 221,810
Minority Interest 12,907 4,340
Shareholder's equity 450,777 432,184
----------- -----------
1,619,745 1,034,491
=========== ===========
* Adjusted due to the Tadiran share purchase transaction
ELBIT SYSTEMS LTD.
CONSOLIDATED STATEMENTS OF INCOME
(In thousand of US Dollars, except for per share amounts)
For the Year Ended Three Months Ended
December 31 December 31
------------------------- -----------------------
2005 2004* 2005 2004*
--------- --------- --------- --------
Audited Unaudited
Revenues 1,069,876 939,925 321,760 270,775
Cost of revenues 786,616 689,826 239,836 198,198
Restructuirng expenses 3,488 - 3,488 -
--------- --------- --------- --------
Gross Profit 279,772 250,299 78,446 72,577
Research and development, net 71,903 66,846 18,460 23,277
Marketing and selling 78,648 69,912 23,953 19,190
General and administrative 54,417 47,832 16,155 12,876
IPR&D write-off 7,490 - 7,490 -
--------- --------- --------- --------
Total operating expenses 212,458 184,590 66,058 55,343
--------- --------- --------- --------
Operating income 67,314 65,709 12,388 17,234
Financial expenses, net (11,472) (5,852) (5,199) (2,974)
Other income (expenses), net (5,326) 770 (5,134) 831
--------- --------- --------- --------
Income before income taxes 50,516 60,627 2,055 15,091
Provisions for income taxes 16,335 15,219 4,046 3,507
--------- --------- --------- --------
34,181 45,408 (1,991) 11,584
Equity in net earnings (losses) of affiliated
companies and partnership ** (1,636) 6,645 (2,974) 2,059
Minority rights (58) (180) (710) (639)
--------- --------- --------- --------
Net income 32,487 51,873 (5,675) 13,005
========== ========== ========= ========
Earnings per share
Basic net earnings per share 0.80 1.30 (0.14) 0.32
========== ========== ========= ========
Diluted net earnings per share 0.78 1.26 (0.14) 0.31
========== ========== ========= ========
* Adjusted due to the Tadiran share purchase transaction
** Includes IPR&D write-off of $8,500 in 2005
EXHIBIT 2
ELBIT SYSTEMS LTD.
MANAGEMENT'S REPORT
FOR THE YEAR ENDED DECEMBER 31, 2005
THIS REPORT SHOULD BE READ TOGETHER WITH THE AUDITED CONSOLIDATED
FINANCIAL STATEMENTS AND RELATED NOTES OF ELBIT SYSTEMS LTD. ("ELBIT
SYSTEMS" AND TOGETHER WITH ITS SUBSIDIARIES, THE "COMPANY" OR THE
"GROUP") FOR THE YEAR ENDED DECEMBER 31, 2005 AND THE COMPANY'S FORM
20-F FOR THE YEAR ENDED DECEMBER 31, 2004, FILED BY THE COMPANY WITH
THE U.S. SECURITIES AND EXCHANGE COMMISSION ("SEC") AND WITH THE
ISRAELI SECURITIES AUTHORITY.
FORWARD LOOKING STATEMENTS WITH RESPECT TO THE COMPANY'S BUSINESS,
FINANCIAL CONDITION AND RESULTS OF OPERATIONS IN THIS DOCUMENT ARE
SUBJECT TO RISKS AND UNCERTAINTIES THAT COULD CAUSE ACTUAL RESULTS TO
DIFFER MATERIALLY FROM THOSE CONTEMPLATED IN SUCH FORWARD LOOKING
STATEMENTS, INCLUDING, BUT NOT LIMITED TO, PRODUCT DEMAND, PRICING,
MARKET ACCEPTANCE, CHANGING ECONOMIC CONDITIONS, RISKS IN PRODUCT AND
TECHNOLOGY DEVELOPMENT, THE EFFECT OF THE COMPANY'S ACCOUNTING POLICIES
AS WELL AS CERTAIN OTHER RISK FACTORS WHICH ARE DETAILED FROM TIME TO
TIME IN THE COMPANY'S SEC FILINGS.
A. EXECUTIVE OVERVIEW
------------------
BUSINESS DESCRIPTION
--------------------
Elbit Systems and its subsidiaries (the "Group") operate in the areas
of aerospace, land and naval systems, command, control, communications,
computers, intelligence, surveillance and reconnaissance ("C(4)ISR"),
advanced electro-optic and space technologies, EW suites, airborne
warning systems, ELINT systems, data links and military communications
systems and equipment. The Group also focuses on the upgrading of
existing military platforms and developing new technologies for defense
and homeland security applications.
The Group provides support services for the platforms it upgrades as
well as the systems and products it supplies. In addition, the Group
provides a wide range of logistic support services, including operation
of pilot training services for the Israeli Air Force on a private
financing initiative basis. Several of the Group's companies also
provide advanced engineering and manufacturing services to various
customers, utilizing their significant manufacturing capabilities. The
Group often cooperates with industries in Israel and in various other
countries.
The Group tailors and adapts its technologies, integration skills,
market knowledge and battle-proven systems to each customer's
individual requirements in both existing and new platforms. By
upgrading existing platforms with advanced electronic and electro-optic
technologies, the Group provides customers with cost-effective
solutions, and its customers are able to improve their technological
and operational capabilities within limited defense budgets.
The Group operates in a competitive environment for most of its
projects, systems and products. Competition is based on product and
program performance, price, reputation, reliability, maintenance costs
and responsiveness to customer requirements. This includes the ability
to respond to rapid changes in technology. In addition, its competitive
position sometimes is affected by specific requirements in particular
markets.
1
FINANCIAL HIGHLIGHTS
--------------------
The Company's revenues increased by 13.8% and reached $1,070 million in
2005, as compared to $940 million in 2004.
Net earnings in 2005 were $32.5 million and the diluted earnings per
share were $0.78, as compared to $51.9 million and $1.26, respectively
in 2004.
Excluding a one-time In Process Research and Development ("IPR&D")
write-off of $8.5 million related to the acquisition of Tadiran
Communications Ltd.'s shares and a one-time IPR&D and other write-offs
in the amount of $10.1 million related to the acquisition of Elisra
Electronic Systems Ltd.'s ("Elisra") shares, net earnings in 2005 were
$51.1 million, and the diluted EPS was $1.23, as compared to $52.9
million and an a diluted EPS of $1.29 in 2004.
The Company's results also reflect a write-off of $5.4 million in the
fourth quarter of 2005, due to value impairment in its holdings in
ImageSat International N.V. (see "Other Expenses (Net)" below).
The Company's backlog as of December 31, 2005 reached $3.35 billion, as
compared to $2.15 billion as of December 31, 2004, an increase of 55%.
The Company's cash flow generated from operations in the year ended
December 31, 2005 was $187.6 million, as compared to $81.5 million in
the year ended December 31, 2004.
The Board of Directors declared a dividend of $0.14 per share for the
last quarter of 2005.
B. MARKET TRENDS
-------------
Trends in the defense electronics and homeland security markets in
which the Company operates have been impacted by the nature of recent
conflicts and terrorism activities throughout the world. Lessons
learned in Operation Iraqi Freedom, Afghanistan and various terrorist
actions worldwide have increased the focus of defense forces on low
intensity conflicts and homeland security.
In the defense electronics market, there is an increasing demand for
products and systems in the areas of C(4)ISR. Accordingly, while the
Company continues to perform platform upgrades, more emphasis is being
placed on C(4)ISR, including information systems, intelligence
gathering, situational awareness, precision guidance, all weather and
day/night operations, border and perimeter security, UAV's, space and
satellite based defense capabilities and homeland security systems.
The Company believes that its core technologies and abilities will
enable it to take advantage of many of these emerging trends, as well
as to continue to participate in the "Current Force" legacy operations
of its customers.
In recent years consolidations in the defense industry have affected
competition. This has decreased the number but increased the relative
size and resources of the Company's competitors. The Company adapts to
evolving market conditions by adjusting its business strategy to
changing defense market conditions. It also anticipates continued
competition in defense markets due to declining defense budgets in some
countries.
2
The Company believes in its ability to compete on the basis of its
systems development and technological expertise, combat-proven
performance and policy of offering customers overall solutions to
technological, operational and financial needs and in the same time
enhancing the industrial capabilities at these countries.
C. BACKLOG OF ORDERS
-----------------
The Company's backlog of orders as of December 31, 2005 reached $3,347
million (including $340 million in backlog related to Elisra that was
acquired in the fourth quarter of 2005), of which 72% were for orders
outside Israel. The Company's backlog as of December 31, 2004 was
$2,154 million, of which 66% were for orders outside Israel.
Approximately 65% of the Company's backlog as of December 31, 2005 is
scheduled to be performed during 2006 and 2007. The majority of the 35%
balance is scheduled to be performed in 2008 and 2009.
D. OPERATING SUBSIDIARIES AND AFFILIATED ENTITIES
----------------------------------------------
o Elbit Systems Electro-Optics Industries El-Op Ltd. ("El-Op") -
a wholly-owned subsidiary based in Israel, is engaged in the
area of advanced electro-optical products and systems for
military and civilian use. El-Op's business areas include
thermal imaging products, lasers, IMINT solutions, head-up
displays, integrated sights for ground forces, space and
airborne reconnaissance systems and electro-optical homeland
security and defense security systems.
o Elbit Systems of America ("ESA") - is the headquarters for the
U.S. operations of the Group and includes the following
companies:
o EFW Inc. ("EFW"), a wholly-owned subsidiary based in
Fort Worth, Texas, provides combat-proven design,
development, production and life-cycle support of
mission critical systems for U.S. and allied military
tactical platforms.
o Kollsman, Inc. ("Kollsman"), a wholly-owned
subsidiary located in Merrimack, New Hampshire, is a
supplier of avionic equipment, electro-optic systems
and subsystems, vision based solutions and
surveillance systems to the commercial aviation,
defense and homeland security markets.
o International Enterprises, Inc. ("IEI"), a
wholly-owned subsidiary based in Talladega, Alabama,
provides depot level repair, manufacturing and
logistics support for military electronic systems and
components.
o Vision Systems International LLC ("VSI"), a 50% joint
venture with Rockwell Collins, located in San Jose,
California, is a supplier of helmet mounted cueing
systems for fixed-wing, tactical fighter aircraft.
o Cyclone Aviation Products Ltd. ("Cyclone") - a wholly-owned
subsidiary based in Israel, is engaged in the production of
structural components and parts for leading aerospace
3
companies. Cyclone also performs maintenance, repair and
customized upgrading of light airplanes and helicopters.
o Silver Arrow LP - a wholly-owned limited partnership based in
Israel, is engaged in UAV systems development, production and
support and produces a full range of UAV systems for tactical
use.
o Ortek Ltd. ("Ortek") - a wholly-owned subsidiary based in
Israel, is engaged in the development and production of
optical security systems and products and performs a range of
projects for homeland security and defense applications.
o European subsidiary - a wholly-owned subsidiary based in
Belgium, is involved mainly in development, manufacturing and
support of electro-optical products for defense and space
markets.
o Elisra - in which Elbit Systems owns a 70% interest, is
comprised of Elisra Electronic Systems Ltd. ("Elisra"), a
privately held Israeli company, and Elisra's two wholly-owned
Israeli subsidiaries - Tadiran Electronic Systems Ltd. and
Tadiran Spectralink Ltd. Elisra specializes in the design,
manufacture, integration and support of advanced defense
solutions and its main business areas include EW suites,
airborne warning systems, ELINT systems, artillery C4I systems
and data links for UAVs and guided munitions.
o Kinetics Ltd. ("Kinetics") - a 51%-owned subsidiary based in
Israel, is involved mainly in the development and production
of systems and components for combat vehicles.
o Semi-Conductor Devices ("SCD") - an Israeli affiliated
partnership held in equal part by each of the Company and
Rafael Armaments Development Authority Ltd. ("Rafael"), is
engaged in the development and production of infrared
detectors and laser diodes.
o Opgal Optronic Industries Ltd. ("Opgal") - an Israeli
affiliated company, owned 50.1% by the Company and 49.9% by
Galram Technologies Ltd., a wholly-owned subsidiary of Rafael,
is engaged mainly in the area of thermal imaging systems for
commercial applications.
o Tadiran Communications Ltd. ("Tadiran") - a publicly-traded
Israeli company in which Elbit Systems holds an approximately
40% interest, is engaged in the worldwide market for military
communications systems and equipment and is also active in the
civilian communications market.
The Company has holdings, directly and indirectly, in several
relatively small companies in various countries. These companies are
engaged mainly in the manufacturing, marketing and servicing of defense
avionics and electronics as well as defense related software.
The Company also has holdings, directly and indirectly, in several
non-defense technologies spin-off companies whose activities are
usually based on technologies that were developed by the Group. The
spin-off companies are involved primarily in the areas of medical
equipment and space satellites.
The Company evaluates investments in affiliates, partnerships and other
companies, and when relevant factors indicate other than temporary
decline in the fair value of the investments below
4
their carrying value, the Company adjusts the investment to the
estimated fair value. The value of these companies is subject to
ongoing changes resulting from their business conditions.
E. RECENT EVENTS
-------------
o On December 4, 2005, the Company announced that it signed an
approximately (euro)57 million contract for a helicopter
upgrade program with the Bulgarian Ministry of Defense. This
program was the subject of previous announcements by the
Company on December 21, 2004 and March 10, 2005.
o On December 12, 2005, the Company reported that its U.S.
subsidiary Kollsman, was awarded initial orders in the amount
of $33.6 million to provide high performance Thermal Binocular
System Long Range Thermal Imagers (LRTI) for the U.S. Marine
Corps. Under the indefinite delivery / indefinite quantity
(IDIQ) contract the U.S. Government may purchase up to 5,000
LRTI's as well as spare parts, contractor maintenance and
training items over a five-year period. Therefore, there is
the potential for up to $250 million in additional orders to
Kollsman.
o On December 18, 2005, the Company announced that its
subsidiary El-Op was selected by the Korean Air Force to
supply Real Time EO/IR Long Range Oblique Imagery Systems for
the ROKAF's F-16 Aircraft. The contract, valued at
approximately $50 million, will be performed over a multi-year
period.
o On January 2, 2006, the Company reported that its 70%-owned
subsidiary, Elisra completed the finalization process of a
contract valued at approximately $80 million to supply full
electronic warfare (EW) suites for fighter aircraft to an
international customer. The contract will be performed over a
three-year period.
o On January 4, 2006, the Company reported that its 40%-owned
subsidiary, Tadiran announced that it expected to post a $10
million to $15 million net loss for the fourth quarter of
2005, resulted mainly from the loss of approximately $20
million in planned revenues due to a seven-week strike that
ended on December 28, 2005, and to a one-time write-off that
is expected to be recognized in connection with the
anticipated early retirement of approximately 50 employees, as
part of Tadiran's recently signed collective bargaining
agreement.
o On February 2, 2006, the Company reported that it was selected
to supply Unmanned Turrets systems for the Belgian Armored
Infantry Vehicle Program in co-operation between the Company
and the Swiss company Mowag, a part of the General Dynamics
European Land Combat Systems Group. The anticipated contract
value for the Company's portion of the Program amount is
expected to be material to the Company. Deliveries are
expected to take place between 2007 - 2012.
o On February 13, 2006, the Company announced that it expects to
record in the fourth quarter of 2005 an estimated $20 million
to $25 million in costs, which is related to its acquisition
of a 70% interest in Elisra, the purchase of an additional 13%
interest in Tadiran, the impact of certain developments that
occurred in Tadiran during the fourth quarter of 2005 and
value impairment in connection with companies in which the
Company holds a minority interest.
5
F. CRITICAL ACCOUNTING POLICIES AND ESTIMATES
------------------------------------------
The Company's significant accounting policies are described in Note 2
to the audited consolidated financial statements for the year ended
December 31, 2005.
The Company's results of operations and financial condition are based
on the preparation of consolidated financial statements in conformity
with generally accepted accounting principles in the United States
("U.S. GAAP"). The preparation of the consolidated financial statements
requires management to select accounting policies for critical
accounting areas as well as estimates and assumptions that affect the
amounts reported in the consolidated financial statements. Significant
changes in assumptions and/or conditions and changes in critical
accounting policies could materially impact the Company's operating
results and financial condition.
The most critical accounting policy applicable to the Company relates
to revenue recognition as described below.
The Company generates revenues from long-term contracts involving the
design, development, manufacture and integration of defense systems and
products and providing support and services for such systems and
products.
Revenues from long-term contracts are recognized based on Statement of
Position 81-1 "Accounting for Performance of Construction-Type and
Certain Production-Type Contracts" ("SOP 81-1") according to which
revenues are recognized on the percentage-of-completion basis.
Sales under long-term fixed-price contracts which provide for a
substantial level of development efforts in relation to total contract
efforts are recorded using the cost-to-cost method of accounting as the
basis to measure progress toward completing the contract and
recognizing revenues. According to this method, sales and profits are
recorded based on the ratio of costs incurred to estimated total costs
at completion. In certain circumstances, when measuring progress toward
completion, the Company considers other factors, such as achievement of
performance milestones.
Sales and anticipated profit under long-term fixed-price production
type contracts are recorded on a percentage-of-completion basis, using
the units-of-delivery as the basis to measure progress toward
completing the contract and recognizing revenues.
Sales and anticipated profit under long-term fixed-price contracts that
involve both development and production are recorded on a
percentage-of-completion basis, using the cost-to-cost method and
units-of-delivery method as applicable. In certain circumstances, when
measuring progress toward completion under the development portion of
the contract, the Company considers other factors, such as achievement
of performance milestones.
The percentage-of-completion method of accounting requires management
to estimate the cost and gross profit margin for each individual
contract. Estimated gross profit or loss from long-term contracts may
change due to changes in estimates resulting from differences between
actual performance and original estimated forecasts. Such changes in
estimated gross profit are
6
recorded in results of operations when they are reasonably determinable
by management, on a cumulative catch-up basis. Anticipated losses on
contracts are charged to earnings when determined to be probable.
Sales under cost-reimbursement-type contracts are recorded as costs are
incurred. Applicable estimated profits are included in earnings in the
proportion that incurred costs bear to total estimated costs.
Amounts representing contract change orders, claims or other items are
included in sales only when they can be reliably estimated and
realization is probable. Penalties and awards applicable to performance
on contracts are considered in estimating sales and profit rates and
are recorded when there is sufficient information to assess anticipated
contract performance.
The Group believes that the use of the percentage-of-completion method
is appropriate as the Group has the ability to make reasonably
dependable estimates of the extent of progress towards completion,
contract revenues and contract costs. In addition, contracts executed
include provisions that clearly specify the enforceable rights
regarding services to be provided and received by the parties to the
contracts, the consideration to be exchanged and the manner and terms
of settlement. In all cases the Group expects to perform its
contractual obligations and its customers are expected to satisfy their
obligations under the contract.
In cases where the contract involves the delivery of products and
performance of services, the Group follows the guidelines specified in
EITF 00-21, "Revenue Arrangements with Multiple Deliverables" in order
to allocate the contract fees between the products accounted for under
SOP 81-1 and the services accounted for under SAB 104. The services are
recognized throughout the service period.
In certain circumstances, sales under short-term fixed-price production
type contracts are accounted for in accordance with SAB No. 104,
"Revenue Recognition in Financial Statements" ("SAB 104"), and
recognized when the following criteria are met: persuasive evidence of
an arrangement exists, delivery has occurred, the seller's price to the
buyer is fixed or determinable, no further obligation exists and
collectability is reasonably assured.
As for research and development costs accounted for as contract costs
refer to Note 2(T) to the Company's audited consolidated financial
statements for the year ended December 31, 2005.
G. IMPAIRMENT OF GOODWILL AND OTHER LONG-LIVED ASSETS
--------------------------------------------------
Consistent with Statement of Financial Accounting Standards ("SFAS")
No. 142, "Goodwill and Other Intangible Assets," goodwill is not
amortized and is tested at least annually for impairment. According to
SFAS 142, an impairment loss will be recognized when the carrying value
of the goodwill is not recoverable and exceeds its fair value.
The methods commonly used to value a closely held company are the
Income, Market and Cost approaches. The Company's reported units fair
market value was estimated using two valuation methodologies: the
Income Approach and the Market Approach.
As of December 31, 2005, the Company's goodwill amounted to $64
million. The Company tested its goodwill as of December 31, 2005 and
concluded that no assessment of impairment loss was necessary.
7
Consistent with SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets," the Company evaluates long-lived assets
for impairment and assesses their recoverability based upon anticipated
future cash flows. As of December 31, 2005, the Company's long-lived
assets amounted to $363.8 million, including $78.8 million in
intangible assets, and the Company concluded that no impairment loss
was necessary.
Should future impairment tests made by the Company determine that
impairment has occurred in the value of the Company's goodwill or
long-lived assets, such impairment may have a material effect on the
financial results of the Company in the period in which the impairment
is determined. See also "Other Expenses (Net)" below.
H. SARBANES-OXLEY ACT
------------------
According to Section 404 of the U.S. Sarbanes-Oxley Act of 2002, the
Company is required to include in its annual report for the fiscal year
ending December 31, 2006 an assessment, as of the end of the fiscal
year, of the effectiveness of its internal controls over financial
reporting.
During 2004 and 2005, the Company took steps to assure compliance of
its documentation and internal controls over financial reporting with
the guidelines stipulated in the Sarbanes-Oxley Act. The Company plans
to continue with these steps during 2006.
I. NEW ACCOUNTING STANDARDS
------------------------
The significant accounting policies applied in the preparation of these
statements are identical to those applied in preparation of the latest
annual financial statements except as indicated below:
o On December 2004, the FASB issued the revised FAS No. 123,
"Share-Based Payment" ("FAS 123(R)"), which addresses the
accounting for share-based payment transactions in which the
Company obtains employee services in exchange for: (a) equity
instruments of the Company; or (b) liabilities that are based
on the fair value of the Company's equity instruments or that
may be settled by the issuance of such equity instruments.
This Statement eliminates the ability to account for employee
share-based payment transactions using APB 25, "Accounting for
Stock Issued to Employees", and requires instead that such
transactions be accounted for using the grant-date fair value
based method. This Statement was to have been effective as of
the beginning of the first interim or annual reporting period
that commences after June 15, 2005 (July 1, 2005 for the
Company); however, on April 14, 2005, the SEC delayed
effectiveness for companies with fiscal years ending December
31, (such as the Company) to January 1, 2006. This Statement
applies to all awards granted or modified after the
Statement's effective date. In addition, compensation cost for
the unvested portion of previously granted awards that remain
outstanding on the Statement's effective date shall be
recognized on or after the effective date, as the related
services are rendered, based on the awards' grant-date fair
value as previously calculated for the pro-forma disclosure
under SFAS 123. In March 2005, the SEC released SEC Staff
Accounting Bulletin No.107 (SAB 107), "Share-Based Payment"
(SAB 107"). SAB 107 provides the SEC staff's position
regarding the application of FAS 123(R) and contains
interpretive
8
guidance related to the interaction between FAS 123(R) and
certain SEC rules and regulations and also provides the SEC
staff's views regarding the valuation of share-based payment
arrangements for public companies.
o In May 2005, the FASB issued Statement of Financial Accounting
Standard No. 154 ("FAS 154"), "Accounting Changes and Error
Corrections" - a replacement of APB No. 20, Accounting
Changes" and FAS No. 3, "Reporting Accounting Changes in
Interim Financial Statements". FAS 154 provides guidance on
the accounting for and reporting of accounting changes and
error corrections. APB Opinion 20 previously required that
most voluntary changes in accounting principles be recognized
by including in net income of the period of the change the
cumulative effect of changing to the new accounting principle.
FAS 154 requires retrospective application to prior periods'
financial statements of a voluntary change in accounting
principles unless it is impracticable to do so. FAS 154 is
effective for accounting changes and corrections of errors
made in fiscal years beginning after December 15, 2005. The
Company estimates that the adoption of FAS 154 will not have a
significant impact on its results of operations, financial
condition and cash flows.
o In June 2005, the Emerging Issues Task Force ("EITF") released
Issue No. 04-5 "Determining Whether a General Partner, or the
General Partner as a Group, Controls a Limited Partnership or
Similar Entity When the Limited Partners Have Certain Rights"
("EITF 04-5"). EITF 04-5 provides guidance in determining
whether a general partner controls a limited partnership and
therefore should consolidate the limited partnership. EITF
04-5 states that the general partner in a limited partnership
is presumed to control that limited partnership and that the
presumption may be overcome if the limited partners have
either (1) the substantive ability to dissolve or liquidate
the limited partnership or otherwise remove the general
partner without cause or (2) substantive participating rights.
The effective date for applying the guidance in EITF 04-5 was
(1) June 29, 2005 for all new limited partnerships and
existing limited partnerships for which the partnership
agreement was modified after that date and (2) no later than
the beginning of the first reporting period in fiscal years
beginning after December 15, 2005, for all other limited
partnerships. Implementation of EITF 04-5 did not have a
material impact on the Company's financial position in fiscal
2005.
o In November 2005, the FASB issued FSP FAS 115-1. The FSP
addresses the determination as to when an investment is
considered impaired, whether that impairment is other than
temporary, and the measurement of an impairment loss. The FSP
also includes accounting considerations subsequent to the
recognition of other-than-temporary impairment and requires
certain disclosures about unrealized losses that have not been
recognized as other-than-temporary impairments. The guidance
in this FSP amends SFAS No. 115, Accounting for Certain
Investments in Debt and Equity. The FSP replaces the
impairment evaluation guidance of EITF Issue No. 03-1, "The
Meaning of Other-Than-Temporary Impairment and Its Application
to Certain Investments," with references to the existing
other-than-temporary impairment guidance. The FSP clarifies
that an investor should recognize an impairment loss no later
than when the impairment is deemed other-than-temporary, even
if a decision to sell an impaired security has not been made.
The guidance in this FSP is to be applied to reporting periods
beginning after December 15, 2005. As of December 31, 2005,
adoption of FSP FAS 115-1 has not had a material impact on the
Company's financial position or results of operations.
9
J. OFF BALANCE SHEET AND OTHER LONG-TERM ARRANGEMENTS AND COMMITMENTS
------------------------------------------------------------------
o The Company and certain Israeli subsidiaries partially finance
their research and development expenditures under programs
sponsored by the Government of Israel Chief Scientist Office
("OCS") for the support of research and development activities
conducted in Israel. At the time the participations were
received, successful development of the related projects was
not assured.
In exchange for participation in the programs by the OCS, the
Company and the subsidiaries agreed to pay 2% - 5% of total
sales of products developed within the framework of these
programs. The obligation to pay these royalties is contingent
on actual sales of the products.
The Company and some of its subsidiaries may also be obligated
to pay certain amounts to the Israeli Ministry of Defense
("IMOD") and others on certain sales including sales resulting
from the development of some of the technologies developed
with their participation.
o In connection with long-term projects in certain countries,
the Company and certain subsidiaries undertook to use their
respective best efforts to make or facilitate purchases or
investments in those countries at specified percentages
(typically up to 100%) of the amount of the specific contract.
The companies' obligation to make or facilitate third parties
making such investments and purchases is subject to commercial
conditions in the local market, typically without a specific
financial penalty. The maximum aggregate undertaking as of
December 31, 2005 amounted to $666 million to be performed
over a period of up to 10 years. In the opinion of the
Company's Management, the actual amount of the investments and
purchases is anticipated to be less than that mentioned above,
since certain investments and purchases can result in reducing
the overall undertaking on more than a one-to-one basis.
o The future minimum lease commitments of the Group under
various non-cancelable operating lease agreements in respect
of premises, motor vehicles and office equipment are as of
December 31, 2005 as follows: $13.1 million for 2006, $10.2
million for 2007, $8.6 million for 2008, $8.0 million for 2009
and 17.6 million for 2010 and thereafter.
O In connection with bank credits and loans, including
performance guarantees issued by banks and bank guarantees in
order to secure certain advances from customers, the Company
and certain subsidiaries are obligated to meet certain
financial covenants. Such covenants include requirements for
shareholders' equity, current ratio, operating profit margin,
tangible net worth, EBITDA, interest coverage ratio and total
leverage. As of December 31, 2005, the Company and its
subsidiaries, except Elisra, were in compliance with all
covenants.
As at December 31, 2005, Elisra did not comply with some of
its financial covenants. Nonetheless, subsequent to the
balance sheet date, a letter was received from one of the
banks, waving its demand for repayment of the loan for a
period of 15 months from the balance sheet date. In addition,
a letter was also received from the other bank that
10
retroactively updates the financial covenants as at December
31, 2005 (based on the actual ratios at that time) and also
provides updated financial covenants for the coming years. The
bank will examine these updated financial covenants on
December 31, 2006, and in Management's estimation Elisra will
comply with those covenants at that date. Accordingly, loans,
in the amount of $10 million, are classified as long-term
loans.
o As of December 31, 2005, guarantees in the amount of
approximately $667,000 were issued by banks on behalf of Group
companies in order to secure certain advances from customers
and performance bonds.
K. ACQUISITIONS DURING 2005
------------------------
o During the last quarter of 2004 and during 2005, the Company
purchased from Koor Industries Ltd. ("Koor") and in the market
approximately 40% of the shares of Tadiran for approximately
$172 million in cash, and the Company has become Tadiran's
controlling shareholder.
The excess of the amount paid for Tadiran's shares acquired
during 2004 and 2005 over their book value is approximately
$120 million. Based on a purchase price allocation analysis
("PPA") performed by an independent advisor, this excess, net
of taxes, was attributed as follows:
$M Expected useful lives
-- ---------------------
In Process R&D ("IPR&D") 9.5 immediate write-off
Inventory 2.8 up to 2 quarters
Other assets or liabilities 0.7 5 years
Brand name 7.5 15 years
Customer base and backlog 37.7 2-12 years
Technology 22.3 10 years
Goodwill 39.6 indefinite - subject to annual impairment test
----------
120.1
==========
The effect of the above transaction on the Company's 2005 results,
which were reflected as part of the Company's equity in net
earnings of affiliated companies, was as follows:
$M
IPR&D write-off (8.5)
Inventory amortization (2.0)
Other tangible and intangible assets amortization (4.4)
------------
(14.9)
============
Company's portion in Tadiran's results
(according to U.S. GAAP) 3.8
------------
Net effect (11.1)
============
o On November 30, 2005, the Company announced the completion of
the purchase of the shares of Koor in Elisra for approximately
$68.8 million in cash. Following the completion of the
transaction, the Company owns 70% of Elisra and Elisra's two
major subsidiaries - Tadiran Electronic Systems Ltd. and
Tadiran Spectralink Ltd.
11
The completion of the purchase of Elisra's shares was made
possible following the receipt of all required approvals,
including that of the Israeli Antitrust Authorities. In
accordance with the Israeli antitrust approval, the Company
has agreed to fulfill conditions imposed by the Antitrust
Authorities related to the market environment between Elbit
Systems and Israel Aircraft Industries Ltd. ("IAI"), which
holds the balance of Elisra's shares. Should the Antitrust
Authorities conclude, during the course of a five-year period
following the acquisition, that Elbit Systems has not complied
with such conditions, the Antitrust Authorities may take
various measures, including steps that could result in the
cessation of the joint holdings in Elisra by the Company and
IAI, including the possible need for the Company to sell its
shares in Elisra.
The excess of the amount paid for the Elisra's shares acquired
over their book value is approximately $60.2 million. Based on
a PPA performed by an independent advisor, this excess was
attributed as follows:
$M Expected useful lives
-- ---------------------
IPR&D 7.5 immediate write-off
Inventory 1.2 up to 2 quarters
Land and buildings 5.7 20 years
Customer base and backlog 11.8 10 years
Technology 9.5 10 years
Deferred taxes (5.4) According to the relevant item above
Goodwill 29.9 indefinite - subject to annual impairment test
----------
60.2
==========
The results of Elisra's operations have been included in the
consolidated financial statements from the date of acquisition.
Following the acquisition of Elisra's shares in the fourth quarter
of 2005, the Company identified and wrote-off duplicated
inventories and equipment in the amount of $3.5 million, which
were recorded as restructuring expenses in the cost of goods sold
(net effect of $2.6 million).
12
L. SUMMARY OF FINANCIAL RESULTS
----------------------------
The following table sets forth the consolidated statements of
operations of the Company and its subsidiaries for the three-month
periods and years ended December 31, 2005 and December 31, 2004.
For the year For the three months
ended on December 31 ended on December 31
----------------------------------------- -----------------------------------------
2005 2004 2005 2004
------------------- -------------------- -------------------- -------------------
$ % $ % $ % $ %
---------- -------- ---------- -------- ---------- -------- ---------- --------
(In thousands of U.S. dollars except per share data)
Total revenues 1,069,876 100.0 939,925 100.0 321,760 100.0 270,775 100.0
Cost of revenues 786,616 73.5 689,626 73.4 239,826 74.5 198,198 73.2
Restructuring expenses (pre-contract and
equipment write-off) 3,488 0.4 -- 0.0 3,488 0.4 -- 0.0
---------- -------- ---------- -------- ---------- -------- ---------- --------
Gross profit 279,772 26.1 250,299 26.6 78,446 24.4 72,577 26.8
---------- -------- ---------- -------- ---------- -------- ---------- --------
Research and development (R&D) expenses 92,375 8.6 86,368 9.2 25,482 7.9 32,370 12.0
Less - participation (20,472) (1.9) (19,522) (2.1) (7,022) (2.2) (9,094) (3.4)
---------- -------- ---------- -------- ---------- -------- ---------- --------
R&D expenses, net 71,903 6.7 66,846 7.1 18,460 5.7 23,277 8.6
Marketing and selling expenses 78,648 7.4 69,912 7.4 23,953 7.4 19,190 7.0
General and administrative expenses 54,417 5.1 47,832 5.1 16,155 5.0 12,876 4.8
IPR&D write-off 7,490 0.7 -- 0.0 7,490 0.7 -- 0.0
---------- -------- ---------- -------- ---------- -------- ---------- --------
212,458 19.9 184,590 19.6 66,058 20.5 55,343 20.4
---------- -------- ---------- -------- ---------- -------- ---------- --------
Operating income 67,314 6.3 65,709 7.0 12,388 3.9 17,234 6.5
Finance expenses, net (11,472) (1.1) (5,852) (0.6) (5,199) (1.6) (2,974) (1.1)
Other expenses, net (5,326) (0.5) 770 0.1 (5,134) (1.6) 831 0.3
---------- -------- ---------- -------- ---------- -------- ---------- --------
Income before taxes on income 50,516 4.7 60,627 6.4 2,055 0.6 15,091 5.6
Taxes on income 16,335 1.5 15,219 1.6 4,046 1.2 3,507 1.3
---------- -------- ---------- -------- ---------- -------- ---------- --------
34,181 3.2 45,408 4.8 (1,991) (0.6) 11,584 4.3
Minority interest in loses (gains) of
Subsidiaries (58) (0.0) (180) 0.0 (710) (0.2) (639) (0.2)
Equity in net earnings (losses) of affiliated
companies and partnership (1,636) (0.2) 6,645 0.7 (2,974) (0.9) 2,059 1.2
---------- -------- ---------- -------- ---------- -------- ---------- --------
Net earnings 32,487 3.0 51,873 5.5 (5,675) (1.7) 13,005 5.2
========== ======== ========== ======== ========== ======== ========== ========
Diluted earnings per share 0.78 1.26 (0.14) 0.31
========== ====== ========== ==========
13
REVENUES
--------
The Company's sales are primarily to governmental entities and prime
contractors under government defense programs. Accordingly, the level
of the Company's revenues is subject to governmental budgetary
constraints.
The Company's consolidated revenues increased by 13.8%, from $939.9
million in 2004 to $1,069.9 million in 2005.
Following the acquisition of Elisra's shares, the Company's
consolidated revenues in 2005 includes $15.7 million of Elisra's
revenues.
The following table sets forth the Company's revenue distribution by
areas of operation:
Year ended
-------------------------------------------
December 31, 2005 December 31, 2004
--------------------- --------------------
$ millions % $ millions %
Airborne systems 420.8 39.3 367.9 39.1
Land systems 117.4 11.0 199.2 21.2
C(4)ISR systems 217.3 20.3 108.9 11.6
Electro-optics 242.3 22.7 200.3 21.3
Other (mainly non-defense engineering and
production services) 72.1 6.7 63.6 6.8
------- ----- ----- -----
Total 1,069.9 100.0 939.9 100.0
======= ===== ===== =====
Land systems revenues decreased by 41% from $199.2 million to $117.4
million. The decrease in land systems revenues was mainly as a result
of temporary delay in some projects that the Company believes will be
sold during 2006.
C(4)ISR systems revenues increased by 100% from $108.9 million to
$217.3 million. The increase in C(4)ISR revenues resulted mainly from
sales in the IMOD's Digital Army Program ("DAP") related projects.
Electro-optics revenues increased by 21% from $200.3 million to $242.3
million. The increase in electro-optics revenues resulted from
increased sales of homeland security systems for international
customers, night vision equipment for various customers, as well as
sales of electro-optic products by a European subsidiary.
The following table sets forth the Company's distribution of revenues
by geographical regions:
Year ended
-----------------------------------------------------
December 31, 2005 December 31, 2004
--------------------- --------------------
$ millions % $ millions %
Israel 315.4 29.5 241.6 25.7
United States 397.5 37.2 348.5 37.1
Europe 104.2 9.7 124.1 13.2
Other countries 252.8 23.6 225.7 24.0
------- ---- ----- ----
Total 1,069.9 100.0 939.9 100.0
======= ===== ===== =====
14
The changes in revenues by geographic distribution were in the revenues
from customers in Europe, which decreased mainly as a result of the
temporary reduction in the land systems area of operations, while
revenues in all other geographical regions increased. The increase in
revenues in Israel was mainly from programs in the C(4)ISR area.
GROSS PROFIT
------------
The Company's gross profit represents the aggregate results of the
Company's activities and projects and is based on the mix of programs
in which the Company is engaged during the reported period.
Following the acquisition of Elisra's shares in the fourth quarter of
2005, the Company identified and wrote-off duplicated inventories and
equipment in the amount of $3.5 million, which were recorded as
restructuring costs in the cost of goods sold.
Reported gross profit in 2005 was $279.8 million (with a gross profit
margin of 26.1%), as compared to $250.3 million (gross profit margin of
26.6%) in 2004.
Excluding the write-off as mentioned above, gross profit in 2005 was
$283.3 million (gross profit margin of 26.5%).
RESEARCH AND DEVELOPMENT ("R&D")
--------------------------------
The Company continually invests in R&D in order to maintain and further
advance its technologies, in accordance with a long-term plan, based on
its estimate of future market needs.
The Company's R&D activities in the reported period are coordinated
with, and partially funded by, third parties, including the IMOD and
the OCS. These programs were mainly in the areas of advanced airborne
systems, cutting edge electro-optics technology and products for
surveillance, aerial reconnaissance, lasers and space based sensors.
Gross R&D expenses in 2005 totaled $92.4 million (8.6% of revenues), as
compared with $86.4 million (9.2% of revenues) in 2004.
Net R&D expenses (after deduction of third party participation,
including the IMOD and the OCS) in 2005 totaled $71.9 million (6.7% of
revenues), as compared to $66.8 million (7.1% of revenues) in 2004.
MARKETING AND SELLING EXPENSES
------------------------------
The Company maintains its activities in developing new markets and
pursues various business opportunities according to the Company's
plans.
Marketing and selling expenses in 2005 were $78.6 million (7.4% of
revenues), as compared to $69.9 million (7.4% of revenues) in 2004.
GENERAL AND ADMINISTRATIVE ("G&A") EXPENSES
-------------------------------------------
G&A expenses in 2005 were $54.4 million (5.1% of revenues), as compared
to $47.8 million
15
(5.1% of revenues) in 2004.
The increase in G&A expenses in 2005 compared to 2004 was related to
the cost of various exploratory merger and acquisition, legal, audit
and control activities, including expenses related to compliance with
the Sarbanes-Oxley Act.
FINANCING EXPENSES (NET)
------------------------
Net financing expenses in 2005 were $11.5 million, as compared to $5.9
million in 2004.
The increase in the net finance expenses resulted mainly from a higher
level of long-term loans, currency exchange rate differences and an
increase in market interest rates.
OTHER EXPENSES (NET)
--------------------
Other expenses in 2005 were a $5.3 million loss as compared to a $0.8
million gain in 2004.
During the fourth quarter of 2005, the fair value of ImageSat
International N.V. ("ISI"), an approximately 14% affiliate of the
Company, decreased as a result of a decrease in ISI's backlog and
estimated future cash flows. Based on a valuation performed by an
independent advisor, the Company wrote-off approximately $5.4 million
of its investment in ISI.
TAXES ON INCOME
---------------
The Company's tax rate represents a weighted average of the tax rates
to which the various companies in the Group are subject. The change in
the effective tax rate is attributable mainly to the mix of the tax
rates in the various tax jurisdictions in which the Group's companies
generating the taxable income operate and the continued decrease in the
tax rate in Israel.
Provision for taxes in 2005 was $16.3 million (tax rate of 32.3%), as
compared to a provision for taxes of $15.2 million (tax rate of 25.1%)
in 2004.
Excluding the IPR&D related to Elisra and the write-off related to ISI,
which are not deductible for tax purposes, the Company's effective tax
rate was 25.8%.
COMPANY'S SHARE IN EARNINGS OF AFFILIATED ENTITIES
--------------------------------------------------
In 2005, the Company had net expense of $1.6 million from its share in
earnings of affiliated entities, as compared to an income of $6.6
million in 2004.
The Company's share in 2005 includes the write-off of IPR&D related to
the acquisition of Tadiran's shares, which amounted to $8.5 million.
Excluding the IPR&D write-offs, the Company's share in earnings of
affiliated entities in 2005 was a net income of $6.9 million.
The companies and partnerships, in which the Company holds 50% or less
in shares or voting rights and are therefore not consolidated in its
financial statements, operate in complementary areas to the Company's
core business activities, including electro-optics, airborne systems
and
16
communications. This includes the Company's share in the earnings of
Tadiran and reflects the impact of the corresponding purchase price
allocation adjustments described above.
NET EARNINGS AND EARNINGS PER SHARE ("EPS")
-------------------------------------------
Reported net earnings in 2005 were $32.5 million (3.0% of revenues), as
compared to reported net earnings of $51.9 million (5.5% of revenues)
in 2004. Reported fully diluted EPS was $0.78 in 2005, as compared to
$1.29 in 2004.
Excluding the IPR&D and write-offs related to Tadiran and Elisra, which
amounted in 2005 to approximately $18.6 million, net earnings in 2005
were $51.1 million (4.8% of revenues) and the EPS was $1.23, as
compared to $52.9 million (5.6% of revenues) and an EPS of $1.29 in
year ended December 31, 2004.
The number of shares used for computation of diluted EPS in the year
ended December 31, 2005 was 41,623 thousand shares, as compared to
41,041 thousand shares in the year ended December 31, 2004.
M. LIQUIDITY AND CAPITAL RESOURCES
-------------------------------
The Company's net cash flow generated from operating activities in 2005
was $187.6 million, resulting mainly from net income and advances
received from customers. The cash inflows were partially offset, mainly
by an increase in inventories and by payments of trade payables.
Net cash flows used for investment activities in the year ended
December 31, 2005 were $241.7 million, which was used mainly for
acquisition of Tadiran's and Elisra's shares and for procurement of
various assets and equipment.
Net cash flow derived from financing activities in 2005 was $113.9
million, which was mainly from receipt of long-term loans.
On December 31, 2005, the Company had total borrowings in the amount of
$262.6 million, including $225 million in long-term loans and $667
million in guarantees issued on its behalf by banks, mainly in respect
of advance payment and performance guarantees provided in the regular
course of business. On December 31, 2005, the Company had a cash
balance amounting to $93.9 million.
The Company and some of its subsidiaries operate with loan and credit
agreements that contain certain covenants. Such covenants include
requirements for shareholders' equity, current ratio, operating profit
margin, tangible net worth, EBITDA, interest coverage ratio and total
leverage. As of December 31, 2005, the Company and its subsidiaries are
in compliance with all such covenants.
As of December 31, 2005, the Company had working capital of $227
million and its current ratio was 1.37. The Company's ratio of equity
to total assets was 27.8%.
17
N. DERIVATIVES AND HEDGES
----------------------
Market risks relating to the Company's operations result primarily from
changes in interest rates and exchange rates. The Company typically
uses financial instruments to limit its exposure to those changes. The
Company also typically enters into forward contracts in connection with
transactions that are denominated in currencies other than U.S. dollars
and New Israeli Shekels ("NIS"). The Company may enter from time to
time into forward contracts related to NIS, based on market conditions.
On December 31, 2005, the Company's liquid assets were comprised of
bank deposits, and it had no investments in liquid equity securities
that were subject to market fluctuations, except for the Tadiran shares
acquired as mentioned above. The Company's deposits and loans are based
on variable interest rates. Should interest rates either increase or
decrease, such change may affect the Company's results of operations
due to changes in the cost of the liabilities and the return on the
assets that are based on variable rates.
The Company's functional currency is the U.S. dollar. On December 31,
2005, the Company had exposure due to liabilities denominated in NIS of
$37 million in excess of its NIS denominated assets. These liabilities
represent mostly wages and trade payables. The amount of the Company's
exposure to the changes in the NIS-U.S. dollar exchange rate varies
from time to time.
Most of the Company's assets and liabilities which are denominated in
currencies other than the NIS and the U.S. dollar were covered as of
December 31, 2005 by forward contracts and options. On December 31,
2005, the Company had forward contracts for the sale and purchase of
such foreign currencies totaling $220 million ($22 million in Euro,
$194 million in GBP and $4 million in other currencies). The financial
derivative activities in the fourth quarter of 2005 resulted in an
unrealized net gain of approximately $6.3 million, which was recorded
as other comprehensive income.
O. DIVIDENDS
---------
The Board of Directors declared on March 13, 2006 a dividend of $0.14
per share for the last quarter of 2005. The total dividend declared for
2005 was $0.54 per share.
* * * * * * * * * * * * * *
EXHIBIT 3
--------------------------------------------------------------------------------
ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES
--------------------------------------------------------------------------------
CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2005
(IN U.S. DOLLARS)
--------------------------------------------------------------------------------
ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES
--------------------------------------------------------------------------------
CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2005
IN U.S. DOLLARS
C O N T E N T S
PAGE
------------
EPORT OF INDEPENDENT REGISTRED PUBLIC ACCOUNTING FIRM 2
ONSOLIDATED FINANCIAL STATEMENTS:
Consolidated Balance Sheets 3 - 4
Consolidated Statements of Income 5
Statements of Changes in Shareholders' Equity 6 - 7
Consolidated Statements of Cash Flows 8 - 9
Notes to the Consolidated Financial Statements 10 - 60
# # # # # # #
1
[LOGO OF ERNST & YOUNG] KOST FORER GABBAY & KASIERER Phone: 972-4-8654000
2 Pal-Yam St. Fax: 972-4-8654022
Haifa-33095, Israel
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
TO THE SHAREHOLDERS OF
ELBIT SYSTEMS LTD.
We have audited the accompanying consolidated balance sheets of Elbit Systems
Ltd. ("the Company") and its subsidiaries as of December 31, 2005 and 2004 (as
adjusted - see Note 1(G)), and the related consolidated statements of income,
changes in the shareholders' equity and cash flows for the each of the three
years in the period ended December 31, 2005. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We did not audit the financial statements of a majority-owned subsidiary, which
statements reflect total assets constituting 16.3% in 2005 and total revenues
constituting 1.5% in 2005, respectively, of the related consolidated totals.
Those financial statements were audited by other auditors whose report has been
furnished to us, and our opinion, insofar as it relates to the amounts included
for this subsidiary, is based solely on the report of the other auditors.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. We were not engaged to perform an
audit of the Company's internal control over financial reporting. Our audit
included consideration of internal control over financial reporting as a basis
for designing audit procedures that are appropriate in the circumstances, but
not for the purpose of expressing an opinion on the effectiveness of the
Company's internal control over financial reporting. Accordingly, we express no
such opinion. An audit also includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits and the report of other auditors provide a reasonable basis for our
opinion.
In our opinion, based on our audits and the report of other auditors, the
consolidated financial statements referred to above present fairly, in all
material respects, the consolidated financial position of the Company and its
subsidiaries as of December 31, 2005 and 2004, and the consolidated results of
their operations, and their cash flows for each of the three years in the period
ended December 31, 2005, in conformity with U.S generally accepted accounting
principles.
As discussed in Note 2(X) to the consolidated financial statements, on January
1, 2004 the Company adopted SFAS No. 123 "Accounting for Stock-Based
Compensation."
KOST FORER GABBAY & KASIERER
A MEMBER OF ERNST & YOUNG GLOBAL
Haifa, Israel
March 13, 2006
2
ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
--------------------------------------------------------------------------------
U.S. dollars (In thousands)
December 31,
--------------------------------
NOTE 2005 2004 (*)
----------- -------------- --------------
CURRENT ASSETS:
Cash and cash equivalents $ 93,887 $ 34,109
Short-term bank deposits 742 738
Trading securities 2,282 -
Trade receivables, (net of allowance for doubtful
accounts in the amount of $3,221 and $3,064 as of December
31, 2005 and 2004, respectively) (3) 346,689 214,816
Other receivables and prepaid expenses (4) 67,096 51,794
Inventories, net of advances (5) 328,428 248,041
-------------- --------------
Total current assets 839,124 549,498
-------------- --------------
INVESTMENTS AND LONG-TERM RECEIVABLES:
Investments in affiliated companies and a partnership (6A) 194,994 47,873
Investments in other companies (6B) 6,345 11,745
Compensation receivable in respect of fire damages, net (7) 15,530 --
Long-term bank deposits and trade receivables (8) 2,457 2,102
Severance pay fund (2P) 133,570 82,998
-------------- --------------
352,896 144,718
-------------- --------------
PROPERTY, PLANT AND EQUIPMENT, NET (9) 284,997 244,288
-------------- --------------
INTANGIBLE ASSETS: (10)
Goodwill 63,957 33,706
Other intangible assets, net 78,771 62,281
-------------- --------------
142,728 95,987
-------------- --------------
$ 1,619,745 $ 1,034,491
============== ==============
* Adjusted (See Note 1G)
The accompanying notes are an integral part of the consolidated financial
statements
3
ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
--------------------------------------------------------------------------------
U.S. dollars (In thousands, except share data)
DECEMBER 31,
--------------------------------
NOTE 2005 2004 (*)
----------- -------------- --------------
CURRENT LIABILITIES:
Short-term bank credit and loans (11) $ 30,296 $ 8,592
Current maturities of long-term loans (14) 7,355 1,656
Trade payables 120,260 113,691
Other payables and accrued expenses (12) 216,539 172,109
Customers advances in excess of
costs incurred on contracts in progress (13) 237,718 80,109
-------------- --------------
Total current liabilities 612,168 376,157
-------------- --------------
LONG-TERM LIABILITIES:
Long-term loans (14) 224,982 86,234
Advances from customers (13) 122,263 10,320
Deferred income taxes (16) 31,424 24,516
Accrued termination liability (15, 2P) 165,224 100,740
-------------- --------------
543,893 221,810
-------------- --------------
COMMITMENTS AND CONTINGENT LIABILITIES (17)
MINORITY INTERESTS 12,907 4,340
-------------- --------------
SHAREHOLDERS' EQUITY: (18)
Share capital
Ordinary shares of New Israeli Shekels (NIS) 1 par value;
Authorized - 80,000,000 shares as of
December 31, 2005 and 2004;
Issued - 41,375,545 and 40,969,947 shares as
of December 31, 2005 and 2004, respectively;
Outstanding - 40,966,624 and 40,561,026 shares
as of December 31, 2005 and 2004, respectively 11,636 11,548
Additional paid-in capital 278,679 274,432
Accumulated other comprehensive loss (1,340) (4,742)
Retained earnings 166,123 155,267
Treasury shares - 408,921 shares as of
December 31, 2005 and 2004 (4,321) (4,321)
-------------- --------------
450,777 432,184
-------------- --------------
$ 1,619,745 $ 1,034,491
============== ==============
* Adjusted (See Note 1G)
The accompanying notes are an integral part of the consolidated financial
statements
4
ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
--------------------------------------------------------------------------------
U.S. dollars (In thousands, except share and per share data)
YEAR ENDED DECEMBER 31,
-------------------------------------------
NOTE 2005 2004 (*) 2003
--- ----------- ----------- -----------
Revenues (19) $ 1,069,876 $ 939,925 $ 897,980
Cost of revenues 786,616 689,626 672,711
Restructuring expenses (pre-contract costs and equipment write-off)
(1H) 3,488 - -
----------- ----------- -----------
Gross profit 279,772 250,299 225,269
----------- ----------- -----------
Research and development expenses, net (20) 71,903 66,846 54,919
Marketing and selling expenses 78,648 69,912 69,943
General and administrative expenses 54,417 47,832 46,077
In process research and development write-off (1H) 7,490 - -
----------- ----------- -----------
212,458 184,590 170,939
----------- ----------- -----------
Operating income 67,314 65,709 54,330
Financial expenses, net (21) (11,472) (5,852) (4,870)
Other income (expenses), net (6B) (5,326) 770 53
----------- ----------- -----------
Income before taxes on income 50,516 60,627 49,513
Taxes on income (16) 16,335 15,219 11,334
----------- ----------- -----------
34,181 45,408 38,179
Equity in net earnings (losses) of affiliated companies and
partnership ** (1G) (1,636) 6,645 7,209
Minority interests in losses (earnings) of subsidiaries (58) (180) 557
----------- ----------- -----------
Net income $ 32,487 $ 51,873 $ 45,945
=========== =========== ===========
Earnings per share
Basic net earnings per share $ 0.80 $ 1.30 $ 1.18
=========== =========== ===========
Diluted net earnings per share $ 0.78 $ 1.26 $ 1.14
=========== =========== ===========
Number of shares used in computation of basic net earnings per
share 40,750 39,952 39,061
=========== =========== ===========
Number of shares used in computation of diluted net earnings per
share 41,623 41,041 40,230
=========== =========== ===========
* Adjusted (See Notes 1G)
** Includes in process research and development write-off of $8,500 in 2005
The accompanying notes are an integral part of the consolidated financial
statements
5
ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
--------------------------------------------------------------------------------
U.S. dollars (In thousands, except share data)
ACCUMULATED
NUMBER OF ADDITIONAL OTHER
OUTSTANDING SHARE PAID-IN COMPREHENSIVE
SHARES CAPITAL CAPITAL INCOME (LOSS)
------------ ------------- ------------- ----------------
BALANCE AS OF JANUARY 1, 2003 38,803,507 $ 11,154 $ 248,387 $ (2,882)
Exercise of options 533,797 119 5,147 -
Tax benefit in respect of options exercised - - 758 -
Stock based compensation - - 4,741 -
Dividends paid - - - -
Other comprehensive income (loss)
net of tax: - - - -
Unrealized loss on derivative instruments - - - (578)
Foreign currency translation differences - - - 340
Minimum pension liability adjustment - - - (872)
Net income - - - -
------------ ------------- ------------- ----------------
Total comprehensive income
BALANCE AS OF DECEMBER 31, 2003 39,337,304 $ 11,273 $ 259,033 $ (3,992)
Exercise of options 1,223,722 275 10,985
Cumulative effect of first time adoption of
the fair value based method for stock
based compensation expenses - - (152) -
Tax benefit in respect of options exercised - - 1,179 -
Stock based compensation - - 3,387 -
Dividends paid - - - -
Other comprehensive income (loss)
net of tax: - - - -
Unrealized loss on derivative instruments - - - (299)
Foreign currency translation differences - - - 450
Minimum pension liability adjustment - - - (901)
Net income - - - -
------------ ------------- ------------- ----------------
Total comprehensive income
BALANCE AS OF DECEMBER 31, 2004* 40,561,026 $ 11,548 $ 274,432 $ (4,742)
============ ============= ============= ================
* Adjusted (see Note 1G)
TOTAL TOTAL
RETAINED TREASURY SHAREHOLDERS' COMPREHENSIVE
EARNINGS SHARES EQUITY INCOME
------------- ------------- ------------- ----------------
BALANCE AS OF JANUARY 1, 2003 $ 159,023 $ (4,321) $ 411,361
Exercise of options - - 5,266
Tax benefit in respect of options exercised - - 758
Stock based compensation - - 4,741
Dividends paid (14,882) - (14,882)
Other comprehensive income (loss)
net of tax: - - -
Unrealized loss on derivative instruments - - (578) $ (578)
Foreign currency translation differences - - 340 340
Minimum pension liability adjustment - - (872) (872)
Net income 45,945 - 45,945 45,945
------------ ------------ --------------- ---------------
Total comprehensive income $ 44,835
===============
BALANCE AS OF DECEMBER 31, 2003 $ 190,086 $ (4,321) $ 452,079
Exercise of options 11,260
Cumulative effect of first time adoption of
the fair value based method for stock
based compensation expenses - - (152)
Tax benefit in respect of options exercised - - 1,179
Stock based compensation - - 3,387
Dividends paid (86,692) - (86,692)
Other comprehensive income (loss)
net of tax: - -
Unrealized loss on derivative instruments - - (299) $ (299)
Foreign currency translation differences - - 450 450
Minimum pension liability adjustment - - (901) (901)
Net income 51,873 - 51,873 51,873
------------ ------------ --------------- -----------------
Total comprehensive income $ 51,123
=================
BALANCE AS OF DECEMBER 31, 2004* $ 155,267 $ (4,321) $ 432,184
============ ============ ===============
* Adjusted (see Note 1G)
The accompanying notes are an integral part of the consolidated financial
statements
6
ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (CONT.)
-------------------------------------------------------------------------------
U.S. dollars (In thousands, except share data)
ACCUMULATED
NUMBER OF ADDITIONAL OTHER
OUTSTANDING SHARE PAID-IN COMPREHENSIVE
SHARES CAPITAL CAPITAL LOSS
------------ ------------- ------------- ----------------
BALANCE AS OF JANUARY 1, 2005 40,561,026 $ 11,548 $ 274,432 $ (4,742)
Exercise of options 405,598 88 3,423 -
Tax benefit in respect of options exercised - - 652 -
Stock based compensation - - 172 -
Dividends paid - - - -
Other comprehensive income (loss)
net of tax:
Unrealized gain on derivative instruments - - - 6,412
Foreign currency translation differences - - - (924)
Minimum pension liability adjustment - - - (2,086)
Net income - - - -
------------ ------------- ------------- ----------------
Total comprehensive income
BALANCE AS OF DECEMBER 31, 2005 40,966,624 $ 11,636 $ 278,679 $ (1,340)
============ ============= ============= ================
TOTAL TOTAL
RETAINED TREASURY SHAREHOLDERS' COMPREHENSIVE
EARNINGS SHARES EQUITY INCOME
------------ ------------ --------------- -----------------
BALANCE AS OF JANUARY 1, 2005 $155,267 $ (4,321) $ 432,184
Exercise of options - - 3,511
Tax benefit in respect of options exercised - - 652
Stock based compensation - - 172
Dividends paid (21,631) - (21,631)
Other comprehensive income (loss)
net of tax:
Unrealized gain on derivative instruments - - 6,412 6,412
Foreign currency translation differences - - (924) (924)
Minimum pension liability adjustment - - (2,086) (2,086)
Net income 32,487 - 32,487 32,487
------------ ------------ --------------- -----------------
Total comprehensive income $ 35,889
=================
BALANCE AS OF DECEMBER 31, 2005 $ 166,123 $ (4,321) $ 450,777
============ ============ ===============
ACCUMULATED OTHER COMPREHENSIVE LOSS (NET OF TAXES)
---------------------------------------------------
DECEMBER 31,
2005 2004
--------------- ------------
Accumulated gains (losses) on derivative instruments $ 5,535 $ (877)
Accumulated foreign currency translation differences (134) 790
Accumulated minimum pension liability adjustment (6,741) (4,655)
--------------- ------------
Accumulated other comprehensive loss $ (1,340) $ (4,742)
=============== ============
The accompanying notes are an integral part of the consolidated financial
statements.
7
ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
--------------------------------------------------------------------------------
U.S. dollars (In thousands)
YEAR ENDED DECEMBER 31,
-------------------------------------
2005 2004** 2003
--------- --------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 32,487 $ 51,873 $ 45,945
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization 57,718 42,261 37,890
Purchased in process R&D 7,490 - -
Stock based compensation 172 3,387 4,741
Deferred income taxes 6,551 153 35
Accrued severance pay, net (6,707) (2,304) (1,240)
Loss (gain) on sale of property, plant and equipment (731) 143 (915)
Tax benefit in respect of options exercised 652 1,179 758
Minority interests in earnings (losses) of subsidiaries 58 180 (557)
Equity in net losses (earnings) of affiliated companies and partnership, net of
dividend received (*) 13,805 1,505 (4,995)
Changes in operating assets and liabilities:
Decrease (increase) in short and long-term trade receivables, and prepaid expenses (43,420) (16,871) 45,297
Decrease (increase) in inventories (43,679) 2,932 (38,651)
Increase (decrease) in trade payables, other payables and accrued expenses (37,859) 20,522 32,147
Increase (decrease) in advances received from customers 202,450 (18,535) (27,855)
Settlement of royalties with the Office of the Chief Scientist (1,371) (3,714) (1,581)
Other adjustments - (1,228) 337
--------- --------- ---------
Net cash provided by operating activities 187,616 81,483 91,356
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property, plant and equipment (58,735) (53,008) (61,287)
Acquisition of subsidiaries and businesses (Schedule A) (28,331) (2,315) (2,458)
Investments in affiliated companies (160,861) (18,391) (1,049)
Proceeds from sale of property, plant and equipment 2,712 2,560 5,815
Proceed from sale of investment 3,100 - -
Investment in long-term bank deposits (1,089) (1,203) (1,750)
Proceeds from sale of long-term bank deposits 1,501 1,507 3,568
Collection of long-term loan - - 2,400
Short-term bank deposits, net (4) (48) 960
--------- --------- ---------
Net cash used in investing activities (241,707) (70,898) (53,801)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from exercise of options 3,511 11,260 5,266
Repayment of long-term bank loans (85,035) (35,826) (27,066)
Receipt of long-term bank loans 216,500 58,410 10,000
Dividends paid (21,631) (86,692) (14,882)
Change in short-term bank credit and loans, net 524 216 (10,997)
--------- --------- ---------
Net cash provided by (used in) financing activities 113,869 (52,632) (37,679)
--------- --------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 59,778 (42,047) (124)
CASH AND CASH EQUIVALENTS AT THE BEGINNING OF THE YEAR 34,109 76,156 76,280
--------- --------- ---------
CASH AND CASH EQUIVALENTS AT THE END OF THE YEAR $ 93,887 $ 34,109 $ 76,156
========= ========= =========
(*) Dividend received $ 12,169 $ 8,150 $ 2,214
========= ========= =========
(**) Adjusted (See Notes 1G)
The accompanying notes are an integral part of the consolidated financial
statements.
8
ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONT.)
--------------------------------------------------------------------------------
U.S. dollars (In thousands)
YEAR ENDED DECEMBER 31,
----------------------------------
2005 2004 2003
-------- -------- --------
SUPPLEMENTAL CASH FLOW ACTIVITIES:
Cash paid during the year for:
Income taxes $ 21,475 $ 13,305 $ 14,666
======== ======== ========
Interest $ 13,151 $ 3,122 $ 4,034
======== ======== ========
SCHEDULE A:
Subsidiaries and businesses acquired (*)
Estimated net fair value of assets acquired and liabilities assumed at the date
of acquisition was as follows:
Working capital, net (excluding cash and cash equivalents) $ 39,273 $ (707) $ 657
Property, plant and equipment (28,875) (10) (249)
Other long term assets (74,363) - -
Goodwill and other intangible assets (53,291) (1,598) (1,334)
In process R&D (7,490) - -
Deferred income taxes 5,404 - (1,765)
Long-term liabilities 82,730 - 198
Minority interest 8,281 - 35
-------- -------- --------
$(28,331) $ (2,315) $ (2,458)
======== ======== ========
(*) In 2003 a European subsidiary (see Note 1(C)) and AD&D (see Note 1(D)).
In 2004 the assets of Computer Instruments Corporation Inc. (see Note
1(E))
In 2005 the assets of IMI (see Note 1(F)) and the shares of Elisra (see
Note 1(H))
The accompanying notes are an integral part of the
consolidated financial statements.
9
ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
U.S. dollars (In thousands)
NOTE 1 - GENERAL
A. Elbit Systems Ltd. (the "Company") is an Israeli corporation,
40.6% owned by the Federmann Group, and 7.6% owned by Koor
Industries Ltd. (Koor"). The Company's shares are traded on
the Tel Aviv Stock Exchange and on the Nasdaq National Market
in the United States. The Company and its subsidiaries (the
"Group") are engaged mainly in the field of defense
electronics. The Company's principal wholly-owned subsidiaries
are the Elbit Systems of America ("ESA") companies and Elbit
Systems Electro-Optics Industries El-Op Ltd. ("El-Op").
B. A majority of the Group's revenues are derived from direct or
indirect sales to governments or to governmental agencies. As
a result, a substantial portion of the Group's sales is
subject to the special risks associated with sales to
governments or to governmental agencies. These risks include,
among others, the dependency on the resources allocated by
governments to defense programs, changes in governmental
priorities and changes in governmental approvals regarding
export licenses required for the Group products and for its
suppliers. As for major customers, refer to Note 19(C).
C. In June 2003, the Company (through El-Op) acquired all of the
outstanding ordinary shares of a European entity, a company
registered in Belgium, in consideration for $1,846 in cash,
which were allocated to the fair value of net tangible asset
acquired. The acquisition was accounted for by the purchase
method of accounting.
This subsidiary develops, manufactures and supports
electro-optical products, mainly for the defense and space
markets.
The results of this subsidiary's operations have been included
in the consolidated financial statements from the date of
acquisition.
Pro forma information in accordance with SFAS No. 141 has not
been provided, since the revenues and net income of this
subsidiary were not material in relation to total consolidated
revenues and net income for the year 2003.
D. In July 2003, the Company acquired approximately 54% of the
outstanding shares of Aero Design Development Ltd. ("AD&D") an
Israeli company in consideration for $1,406 in cash. The
acquisition was accounted for by the purchase method of
accounting.
AD&D develops, manufactures and builds airborne models and
other engineered products.
The excess of the purchase price over the fair value of net
tangible assets acquired in the amount of approximately $1,334
was allocated to technology ($1,000) to be amortized by the
straight-line method over a period of ten years and to
goodwill ($334).
The results of AD&D's operations have been included in the
consolidated financial statements from the date of
acquisition.
10
ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
--------------------------------------------------------------------------------
U.S. dollars (In thousands)
NOTE 1 - GENERAL (CONT.)
On July 2005, the Company completed the purchase of the
remaining shares of AD&D in consideration for $1,025 in cash.
The excess of the purchase price over the fair value of net
tangible assets acquired in the amount of approximately $1,214
was allocated to technology ($900) to be amortized by the
straight-line method over a period of eight years and to
goodwill ($341).
Pro forma information in accordance with SFAS No. 141 has not
been provided, since the revenues and net income of AD&D were
not material in relation to total consolidated revenues and
net income for the years 2003, 2004 and 2005.
E. In August 2004, the Company (through a subsidiary of ESA)
acquired a business from Computer Instruments Corporation Inc.
("CIC") of Westbury, New York in consideration for
approximately $2,315 in cash. The acquired assets relate to
the design and manufacture of aviation pressure transducers,
air data probes and air data computers.
The acquisition was accounted for by the purchase method of
accounting. The excess of the purchase price over the fair
market value of the net tangible assets acquired in the amount
of approximately $1,598 was allocated to technology and other
intangible assets to be amortized over a weighted average
period of seven years.
The results of CIC's operations have been included in the
consolidated financial statements from the date of
acquisition.
Pro forma information in accordance with SFAS No. 141 has not
been provided, since the revenues and net income of CIC were
not material in relation to total consolidated revenues and
net income for the years 2003 and 2004.
F. In March 2005, the Company, through its wholly-owned
subsidiary Cyclone Aviation Products Ltd. ("Cyclone"),
acquired from Israel Military Industries Ltd. ("IMI") the
assets and customers' contracts related to the Aircraft
Systems Division of IMI ("the Aircraft Division") in
consideration for approximately $7 million, paid in cash
(approximately $1 million out of which $718 was paid through
balance sheet date) and assumed liabilities of approximately
$6 million. The excess of the purchase price over the fair
value of net tangible assets acquired in the amount of
approximately $1,500 was allocated to customers' contracts to
be amortized over an estimated period of four years.
The Aircraft Division manufactures weapon payloads and
external fuel tanks for fighter aircraft.
The financial results of the business acquired are included in
the Company's consolidated financial statements from the date
of acquisition.
Pro forma information in accordance with SFAS No. 141 has not
been provided, since the revenues and net income of the
Aircraft Division are not material in relation to the total
consolidated revenues and net income for the years 2004 and
2005.
11
ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
--------------------------------------------------------------------------------
U.S. dollars (In thousands)
NOTE 1 - GENERAL (CONT.)
G. On December 27, 2004, the Company reached an agreement with
Koor to purchase all of Koor's holdings in Tadiran
Communications Ltd. ("Tadiran"), which represented
approximately a 32% interest in Tadiran, at a price of $37 per
share. This purchase was to be made concurrently with Koor's
purchase of a portion of the Company's shares from Federmann
Enterprises Ltd. ("Federmann"). Tadiran is an Israeli company,
whose shares are traded on the Tel Aviv Stock Exchange. The
purchase of the interest in Tadiran was made in several stages
as detailed below.
During 2004, the Company acquired 4.3% of Tadiran's
outstanding shares on the Tel Aviv Stock Exchange in
consideration for $15,900. In 2004 the investment in Tadiran's
shares was accounted for as available-for-sale securities.
In the first and the second quarters of 2005, the Company
acquired additional 17% of Tadiran's outstanding shares in
consideration for $74,100.
As a result of the acquisition in the second quarter of 2005,
the Company was able to exercise significant influence on
Tadiran. In accordance with APB 18, "The Equity Method of
Accounting for Investments in Common Stock", the Company's
interest in Tadiran, which was previously accounted for as
available-for-sale securities, was accounted retroactively
under the equity method of accounting ("step-by-step
acquisition"). Implementing the step-by-step acquisition
method resulted in a adjustments of the Company's financial
statements for 2004, in which the Company's investment in
Tadiran was accounted for as available-for-sale securities.
The following are the effects of the adjustments:
(1) Consolidated balance sheet
December 31, 2004
---------------------------------------
As Effect of As
reported adjustments adjusted
--------- --------- ---------
Other receivables and prepaid expenses $ 51,042 $ 752 $ 51,794
Investment in affiliated companies and
partnership 33,124 14,749 47,873
Available for sale securities 18,017 (18,017) -
Accumulated other comprehensive loss, net of tax (3,346) (1,396) (4,742)
Retained earnings 156,387 (1,120) 155,267
Total shareholders' equity $ 434,700 $ (2,516) $ 432,184
(2) Consolidated statement of income
Year ended December 31, 2004
---------------------------------------
As Effect of As
reported adjustments adjusted
--------- ----------- ---------
Equity in net earnings of affiliated companies
and partnership $ 7,765 $ (1,120) $ 6,645
Net income 52,993 (1,120) 51,873
Basic net earnings per share 1.33 (0.03) 1.30
Diluted net earnings per share $ 1.29 $ (0.03) $ 1.26
12
ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
--------------------------------------------------------------------------------
U.S. dollars (In thousands)
NOTE 1 - GENERAL (CONT.)
On August 25, 2005, the Company purchased an additional 5.2%
of Tadiran's outstanding shares in consideration for $23,000.
Following this purchase, the Company held approximately 26.5%
of Tadiran's shares.
On November 30, 2005, , the Company completed the purchase of
the remaining shares held by Koor in Tadiran, for
approximately $59.3 million in cash. As of December 31, 2005,
the Company holds approximately 40% of Tadiran's shares.
The excess of the amounts paid for the Tadiran shares acquired
during 2004 and 2005 over their book value is detailed below.
Based on a purchase price allocation analysis ("PPA")
performed by an independent advisor, this excess was
attributed as follows:
In the In the In the
Until the first third fourth
end of half of quarter quarter
2004 2005 of 2005 of 2005 Total Expected useful lives
--------- -------- ------- ------- ----- ---------------------
In Process R&D ("IPR&D") $ 1,000 $ 4,000 $ 1,200 $ 3,300 $ 9,500 immediate write-off
Inventory 300 1,200 400 900 2,800 up to a quarter
Other tangible assets and liabilities 100 300 100 200 700 5 years
Brand name 800 3,200 1,000 2,500 7,500 15 years
Customer base and backlog 4,100 16,000 4,900 12,700 37,700 2-12 years
Technology 2,400 9,500 2,900 7,500 22,300 10 years
Goodwill 1,600 17,600 5,800 14,600 39,600 indefinite-subject to
annual impairment test
----------- ---------- ------------- ----------- ------------
Total excess of consideration over book
value $10,300 $51,800 $16,300 $41,700 $120,100
=========== ========== ============= =========== ============
Percentage of interest acquired in
Tadiran 4.3% 17% 5.2% 13.5% 40%
=========== ========== ============= =========== ============
H. On July 6, 2005, the Company signed an agreement with Koor to
acquire all of Koor's 70% holdings in Elisra Electronic
Systems Ltd. ("Elisra"), an Israeli company, in consideration
for $70 million ($68.8 million after certain adjustments) in
cash. The parties also agreed on an additional contingent
consideration as a result of future insurance proceeds
relating to the fire at Elisra's plant in 2001 (see Note 7).
The agreement for acquiring Koor's holdings in Elisra was
signed following the approval of the transaction by the
Company's Audit Committee and Board of Directors, who obtained
a fairness opinion from an independent appraiser regarding the
consideration to be paid for the Elisra shares and following
the Company's shareholders approval in August 2005.
On November 30, 2005, simultaneously with the acquisition of
Koor's shares in Tadiran, the Company completed the purchase
of all of the shares of Koor in Elisra for approximately $68.8
million in cash. Following the completion of the transaction,
the Company owns 70% of Elisra.
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ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
--------------------------------------------------------------------------------
U.S. dollars (In thousands, except per share data)
NOTE 1 - GENERAL (CONT.)
The completion of the purchase of the Elisra shares was made
possible following the receipt of all required approvals,
including that of the Israeli Antitrust Authorities. In
accordance with the Israeli antitrust approval, the Company
has agreed to fulfill conditions imposed by the Antitrust
Authorities related to the market environment between the
Company and Israel Aircraft Industries Ltd. ("IAI"), which
holds the balance of Elisra's shares. Should the Antitrust
Authorities conclude, during the course of a five-year period
following the acquisition, that the Company has not complied
with such conditions, the Antitrust Authorities may take
various measures, including steps that could result in the
cessation of the joint holdings in Elisra by the Company and
IAI.
Elisra has significant complementary technologies and customer
installment base to those of the Group in areas including
ELINT systems, EW suites, airborne warning systems and data
links. The Company's management believes that such
technologies and customer installment base will enable the
Group to offer more comprehensive turnkey solutions to its
customers and strengthen its competitive position.
The excess of the amount paid for the Elisra shares acquired
over their book value is approximately $60.2 million. Based on
a PPA performed by an independent advisor, this excess was
attributed as follows:
Expected useful lives
---------------------
IPR&D $7,500 immediate write-off
Inventory 1,200 up to 2 quarters
Land and buildings 5,700 20 years
Customer base and backlog 11,800 10 years
Technology 9,500 10 years
Deferred taxes (5,400) According to the relevant item above
Goodwill 29,900 indefinite - subject to annual impairment test
-----------------
$60,200
=================
The results of Elisra's operations have been included in the
consolidated financial statements from the date of
acquisition. Regarding performance information in accordance
with SFAS 141, see below.
The following unaudited proforma data is based on historical
financial statements of the Company and Elisra and is provided
for comparative purposes only. The proforma information does
not purport to be indicative of the results that actually
would have occurred had the purchase of the shares have been
consummated prior to the beginning of the reported periods.
The proforma information reflects the results of the Company's
operations assuming that Elisra's results were included in the
Company's consolidated results prior to each of the reported
periods, and under the following assumptions:
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ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
--------------------------------------------------------------------------------
U.S. dollars (In thousands)
NOTE 1 - GENERAL (CONT.)
(1) Intangible assets (customer base, backlog and technology)
arising from the acquisition of Elisra's shares of
approximately $21,300, net of related deferred taxes of
approximately $4,300, is amortized over a period of 10 years.
(2) Excess of cost over equity purchased allocated to real estate
assets of approximately $5,700, net of related deferred taxes
of approximately $1,100, is amortized over a period of 20
years.
(3) The cost attributed to purchase IPR&D projects, in the amount
of approximately $7,500 has been charged to operations
immediately as a non-recurring item and is not included in the
proforma consolidated results.
(4) Intercompany balances and transactions, if any, have been
eliminated.
(5) Management fees which were paid to Elisra's shareholders and
will be paid in the future to the Company were eliminated in
the proforma statements.
FOR THE YEAR ENDED
----------------------------
DECEMBER 31
----------------------------
2005 2004
----------- -----------
Revenues $1,264,375 $1,181,110
=========== ===========
Net income as reported $32,487 $51,873
Adjustments:
Elimination of the charge to operations for IPR&D 7,490 -
Other adjustments, net (21,337) 126
----------- -----------
Net income - proforma (*) $18,640 $51,999
=========== ===========
Basic earnings per share - proforma $0.46 $1.33
=========== ===========
Diluted earnings per share - proforma $0.45 $1.29
=========== ===========
(*) The proforma net income for the year ended December
31, 2005 includes a write-off of pre contract costs
and equipment, net in the amount of $2,616 in the
Company and expenses related to cutback in personnel
in the amount of $19,103 in Elisra.
Following the acquisition of Elisra's shares in the fourth
quarter of 2005, the Company identified and wrote-off
duplicated inventories and equipment in the amount of $3,488
which was recorded as restructuring costs in the cost of
revenues.
I. In October 2005, the Company invested an amount of $2.5
million in Chip PC Ltd. ("Chip PC"), an Israeli company, for a
20% interest in Chip PC.
Chip PC develops and manufactures "Post PC" solutions, focused
on enabling server-based- computing technologies to replace
traditional PCs and deploy and control large numbers of
workstations.
15
ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
--------------------------------------------------------------------------------
U.S. dollars (In thousands)
NOTE 1 - GENERAL (CONT.)
The excess of the amount paid for the Chip PC shares acquired
over their book value is approximately $2.4 million. Based on
a PPA performed by an independent advisor, this excess was
allocated mainly to technology ($1.6 million) to be amortized
by a straight-line method over a period of 5 - 8 years and to
goodwill ($1.1 million).
J. The financial results of the business acquired are included in
the Company's consolidated financial statements from the date
of acquisition. In October 2005, the Company established a
U.K. subsidiary - UAV Tactical Systems Ltd. ("U-Tacs"), in
which the Company holds 51% and the rest of the shares are
held by Thales U.K.. U-Tacs will be the manufacturing and
support center of the Watchkeeper program - an Unmanned Air
Vehicle (UAV) program for the U.K. MOD.
U-Tacs will establish the capabilities to design, manufacture,
integrate and fly tactical UAV systems, consisting of air
vehicles, ground control stations, data links, payloads and
launch and recovery subsystems.
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES
The consolidated financial statements have been prepared in accordance
with generally accepted accounting principles in the United States
("U.S. GAAP"). As applicable to the consolidated financial statements
of the Group, such principles are substantially identical to accounting
principles generally accepted in Israel, except as described in Note
23.
A. USE OF ESTIMATES
The preparation of financial statements in conformity with
generally accepted accounting principles requires management
to make estimates and assumptions that affect the amounts
reported and disclosure of contingent assets and liabilities
in the financial statements and accompanying notes. Actual
results could differ from those estimates.
B. FINANCIAL STATEMENTS IN U.S. DOLLARS
The Company's revenues are generated mainly in U.S. dollars.
In addition, most of the Company's costs are incurred in U.S.
dollars. The Company's management believes that the U.S.
dollar is the primary currency of the economic environment in
which the Company operates. Thus, the functional and reporting
currency of the Company is the U.S. dollar.
Transactions and balances originally denominated in U.S.
dollars are presented at their original amounts. Transaction
and balances in other currencies have been remeasured into
U.S. dollars in accordance with principles set forth in SFAS
No. 52 "Foreign Currency Translation". All exchange gains and
losses from the remeasurement mentioned above are reflected in
the statement of income in financial income or expenses.
16
ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
--------------------------------------------------------------------------------
U.S. dollars (In thousands)
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (CONT.)
B. FINANCIAL STATEMENTS IN U.S. DOLLARS (Cont.)
For those foreign subsidiaries whose functional currency has
been determined to be other than the U.S. dollar, assets and
liabilities are translated at year-end exchange rates and
statement of income items are translated at average exchange
rates prevailing during the year. Resulting translation
adjustments are recorded as a separate component of
accumulated other comprehensive income in shareholders'
equity.
C. PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of
the Company and its wholly and majority-owned subsidiaries.
The consolidated subsidiaries include El-Op, ESA and other
Israeli and non-Israeli subsidiaries.
Intercompany transactions and balances including profit from
intercompany sales not yet realized outside the Group have
been eliminated upon consolidation.
D. CASH EQUIVALENTS
Cash equivalents, are short-term highly liquid investments
that are readily convertible to cash with maturities of three
months or less at the date of acquisition.
E. SHORT-TERM BANK DEPOSITS
Short-term bank deposits are deposits with maturities of more
than three months but less than one year. The short-term bank
deposits are presented at their cost.
F. MARKETABLE SECURITIES
Investments in a marketable securities are classified as
trading securities according to Statement of Financial
Accounting Standard No. 115 "Accounting for Certain
Investments in Debt and Equity Securities", ("SFAS No. 115").
Accordingly, these securities are stated at fair market value,
with gains and losses, net of taxes, reported as finance
income (loss).
G. INVENTORIES
Inventories are stated at the lower of cost or net realizable
value. Inventory write-offs are provided for slow-moving items
or technological obsolescence for which recoverability is not
probable.
Cost is determined as follows:
o Raw materials using the average cost method.
17
ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
--------------------------------------------------------------------------------
U.S. dollars (In thousands)
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (CONT.)
G. INVENTORIES (Cont.)
o Costs incurred on long-term contracts in progress include
direct labor costs, material costs, subcontractors, other
direct costs and overheads. These costs represent recoverable
costs incurred for production, allocable operating overhead
cost and, where appropriate, research and development costs
(refer to Note 2(T)).
o Labor overhead is generally included in our hourly rate and is
allocated to each project according to the amount of hours
invested. Material overhead is allocated to each project based
on the value of direct material that is charged to the
project.
Advances from customers are allocated to the applicable contract
inventories and are presented as net amounts. Advances in excess of
related inventories are classified as liabilities.
H. INVESTMENT IN AFFILIATED COMPANIES, PARTNERSHIP AND OTHER
COMPANIES
Investments in non-marketable shares of companies in which the
Group holds less than 20% and the Group does not have the
ability to exercise significant influence over operating and
financial policies of the companies are recorded at cost.
Investments in companies and partnership over which the Group
can exercise significant influence (generally, entities in
which the Group holds between 20% and 50% of voting rights)
are presented using the equity method of accounting. Profits
on intercompany sales, not realized outside the Group, were
eliminated. The Group discontinues applying the equity method
when its investment (including advances and loans) is reduced
to zero and it has not guaranteed obligations of the affiliate
or otherwise committed to provide further financial support to
the affiliate.
A change in the Company's proportionate share of a
subsidiary's or investee's equity, resulting from issuance of
shares by the subsidiary or investee to third parties, is
recorded as a gain or loss in the consolidated income
statements. If the realization is not assured, such as when
the issuing company is a development stage company, the gain
from issuance is accounted for as an equity transaction
pursuant to SAB 51 "Accounting Sales of Stock by a
Subsidiary".
Management evaluates investments in affiliates and other
companies for evidence of other than temporary declines in
value. When relevant factors indicate a decline in value that
is other than temporary the Company records a provision for
the decline in value. A judgmental aspect of accounting for
investments involves determining whether an
other-than-temporary decline in value of the investment has
been sustained. Such evaluation is dependent on the specific
facts and circumstances. Accordingly, management evaluates
financial information (e.g. budgets, business plans, financial
statements, etc.) in determining whether an
other-than-temporary decline in value exists. Factors
indicative of an other-than-temporary decline include
recurring operating losses, credit defaults and subsequent
rounds of financings at an amount below the cost basis of the
investment. This list is not all inclusive and management
weighs all quantitative and qualitative factors in determining
if an other-than-temporary decline in value of an investment
has occurred. The results of 2005 include impairment loss
related to its investment in ISI (see Note 6(B)2)).
18
ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
--------------------------------------------------------------------------------
U.S. dollars (In thousands)
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (CONT.)
I. LONG-TERM TRADE RECEIVABLES
Long-term trade receivables, from extended payment agreements,
are recorded at their estimated present values (determined
based on the original market rates of interest).
J. LONG-TERM BANK DEPOSITS
Long-term bank deposits are deposits with maturities of more
than one year. These deposits are presented at cost including
accumulated interest.
K. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost, net of
accumulated depreciation and investment grants. For equipment
produced for the Group's own use, cost includes materials,
labor and overhead, but not in excess of the fair value of the
equipment.
Depreciation is calculated by the straight-line method over
the estimated useful life of the assets at the following
annual rates:
%
------
Buildings 2-4
Instruments, machinery and equipment 6-33
Office furniture and other 6-33
Motor vehicles 12-33 (mainly 15%)
Land rights and leasehold improvements - generally over the
term of the lease.
L. INVESTMENT GRANTS
As a governmental incentive for industrial companies in
Israel, the "Investment Center", which is a branch of the
Israel Ministry of Industry and Trade, permits industrial
companies to submit a request to qualify as an "Approved
Enterprise". An Approved Enterprise is entitled to certain
benefits in respect of capital investments. The benefits may
be in the form of reduced tax rates and of capital grants
received as a percentage of the investments of the Approved
Enterprise. The amount of a capital grant is determined as a
percentage of the Approved Enterprise investment in property,
plant and equipment. As a condition to the granting of these
benefits, the Approved Enterprise is obligated to perform the
applicable industrial plan as detailed in the request to the
Investment Center (see Note 16(A)(3) and 17(J)). These capital
grants are non-royalty bearing and are not conditioned on the
results of operations. As the capital grants are a direct
participation in the cost of the acquisition of property,
plant and equipment they are offset against property, plant
and equipment.
19
ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
--------------------------------------------------------------------------------
U.S. dollars (In thousands)
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (CONT.)
M. IMPAIRMENT OF LONG-LIVED ASSETS
The Group's long-lived assets and identifiable intangible
assets are reviewed for impairment in accordance with SFAS No.
144 "Accounting for the Impairment or Disposal of Long-Lived
Assets" whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable.
Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to the future
undiscounted cash flows expected to be generated by the asset.
If an asset is determined to be impaired, the impairment to be
recognized is measured by the amount by which the carrying
amount of the asset exceeds its fair value.
N. INTANGIBLE ASSETS
Intangible assets are stated at cost net of accumulated
amortization. Intangible assets are being amortized over their
useful life using the straight-line method.
O. GOODWILL
Goodwill represents the excess of the cost of acquired
businesses over the net fair values of the assets acquired and
liabilities assumed. Under SFAS No. 142, effective as of
January 1, 2002, goodwill is no longer amortized, but is
instead tested for impairment at least annually (or more
frequently if impairments indicators arise).
SFAS 142 prescribes a two phase process for impairment testing
of goodwill. The first phase screens for impairment, while the
second phase (if necessary) measures impairment.
In the first phase of impairment testing, goodwill
attributable to each of the reporting units is tested for
impairment by comparing the fair value of each reporting unit
with its carrying value. If the carrying value of the
reporting unit exceeds its fair value, the second phase is
then performed. The second phase of the goodwill impairment
test compares the implied fair value of the reporting unit's
goodwill with the carrying amount of that goodwill. If the
carrying amount of the reporting unit's goodwill exceeds the
implied fair value of that goodwill, an impairment loss is
recognized in an amount equal to that excess.
Fair value of a reporting unit is determined using the
discounted future cash flows method. Significant estimates
used in the methodology include estimates of future cash
flows, future short-term and long-term growth rates and
weighted average cost of capital for each of the reporting
units.
As of December 31, 2005, no impairment losses have been
identified.
20
ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
--------------------------------------------------------------------------------
U.S. dollars (In thousands)
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (CONT.)
P. SEVERANCE PAY
Under Israeli law and employment agreements, the Group's
companies in Israel are required to make severance payments
and, in certain situations, pay pensions to terminated
employees. The calculation is based on the employee's latest
salary and the period of his/her employment.
The Group's companies in Israel records a liability for the
amount that would have to be paid to the employees as
severance payment in the event of the companies shut down
The companies' obligation for severance pay and pension is
provided by monthly deposits with insurance companies, pension
funds and by an accrual. The value of severance pay funds is
presented in the balance sheet and includes profits
accumulated to balance sheet date. The amounts deposited may
be withdrawn only after fulfillment of the obligations
pursuant to Israeli severance pay law or labor agreements. The
values of the deposited funds are based on the cash
surrendered value of these funds and include immaterial
profits.
Severance pay expenses for the years ended December 31, 2005,
2004 and 2003, amounted to approximately $17,500, $15,574 and
$11,491, respectively.
Q. REVENUE RECOGNITION
The Group generates revenues from long-term contracts
involving the design, development, manufacture and integration
of defense systems and products and providing support and
services for such systems and products.
Revenues from long-term contracts are recognized based on
Statement of Position 81-1 "Accounting for Performance of
Construction-Type and Certain Production-Type Contracts" ("SOP
81-1") according to which revenues are recognized on the
percentage-of-completion basis.
Sales under long-term fixed-price contracts which provide for
a substantial level of development efforts in relation to
total contract efforts are recorded using the cost-to-cost
method of accounting as the basis to measure progress toward
completing the contract and recognizing revenues. According to
this method, sales and profits are recorded based on the ratio
of costs incurred to estimated total costs at completion. In
certain circumstances, when measuring progress toward
completion, the Company considers other factors, such as
achievement of performance milestones.
Sales and anticipated profit under long-term fixed-price
production type contracts are recorded on a
percentage-of-completion basis, using the units-of-delivery as
the basis to measure progress toward completing the contract
and recognizing revenues.
Sales and anticipated profit under long-term fixed-price
contracts that involve both development and production are
recorded on a percentage-of-completion basis, using the
cost-to-cost method and units-of-delivery method as
applicable. In certain circumstances, when
21
ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
--------------------------------------------------------------------------------
U.S. dollars (In thousands)
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (CONT.)
Q. REVENUE RECOGNITION (Cont.)
measuring progress toward completion under the development
portion of the contract, the Company considers other factors,
such as achievement of performance milestones.
The percentage-of-completion method of accounting requires
management to estimate the cost and gross profit margin for
each individual contract. Estimated gross profit or loss from
long-term contracts may change due to changes in estimates
resulting from differences between actual performance and
original estimated forecasts. Such changes in estimated gross
profit are recorded in results of operations when they are
reasonably determinable by management, on a cumulative
catch-up basis. Anticipated losses on contracts are charged to
earnings when determined to be probable.
Sales under cost-reimbursement-type contracts are recorded as
costs are incurred. Applicable estimated profits are included
in earnings in the proportion that incurred costs bear to
total estimated costs.
Amounts representing contract change orders, claims or other
items are included in sales only when they can be reliably
estimated and realization is probable. Penalties and awards
applicable to performance on contracts are considered in
estimating sales and profit rates and are recorded when there
is sufficient information to assess anticipated contract
performance.
The Group believes that the use of the
percentage-of-completion method is appropriate as the Group
has the ability to make reasonably dependable estimates of the
extent of progress towards completion, contract revenues and
contract costs. In addition, contracts executed include
provisions that clearly specify the enforceable rights
regarding services to be provided and received by the parties
to the contracts, the consideration to be exchanged and the
manner and terms of settlement. In all cases the Group expects
to perform its contractual obligations, and its customers are
expected to satisfy their obligations under the contract
In cases where the contract involves the delivery of products
and performance of services, the Group follows the guidelines
specified in EITF 00-21, "Revenue Arrangements with Multiple
Deliverables" in order to allocate the contract fees between
the products accounted for under SOP 81-1 and the services
accounted for under SAB 104. The services are recognized
throughout the service period.
In certain circumstances, sales under short-term fixed-price
production type contracts are accounted for in accordance with
SAB No. 104, "Revenue Recognition in Financial Statements"
("SAB 104"), and recognized when the following criteria are
met: persuasive evidence of an arrangement exists, delivery
has occurred, the seller's price to the buyer is fixed or
determinable, no further obligation exists and collectability
is reasonably assured.
As for research and development costs accounted for as
contract costs refer to Note 2(T).
22
ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
--------------------------------------------------------------------------------
U.S. dollars (In thousands)
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (CONT.)
R. PRE-CONTRACT COSTS
Pre-contract costs are deferred and included in inventory,
only when such costs can be directly associated with a
specific anticipated contract and if their recoverability from
the specific contract is probable according to the guidelines
of SOP 81-1.
S. WARRANTY
The Group estimates the costs that may be incurred under its
basic warranty and records a liability in the amount of such
costs at the time revenue is recognized. The specific terms
and conditions of those warranties vary depending upon the
product sold and the country in which the Group does business.
Factors that affect the Group's warranty liability include the
number of delivered products, engineering estimates and
anticipated rates of warranty claims. The Group periodically
assesses the adequacy of its recorded warranty liability and
adjusts the amount as necessary.
Changes in the Group's provision for warranty, which is
included in the Company's balance sheet, during the years, are
as follows:
2005 2004
--------------- -------------
Balance, at January 1 $ 34,230 $ 36,653
Warranties issued during the year 19,223 17,907
Warranties forfeited or exercised during the year (21,656) (20,330)
--------------- -------------
Balance, at December 31 $ 31,797 $ 34,230
=============== =============
T. RESEARCH AND DEVELOPMENT COSTS
Research and development costs, net of participations, are
charged to operations as incurred. Group sponsored research
and development costs primarily include independent research
and development and bid and proposal efforts.
Under certain arrangements in which a customer participates in
product development costs, the Group's portion of such
unreimbursed costs is expensed as incurred. Customer-sponsored
research and development costs incurred pursuant to contracts
are accounted for as part of the contract costs.
Certain Group companies in Israel receive grants (mainly
royalty-bearing) from the Government of Israel and from other
sources for the purpose of funding approved research and
development projects. These grants are recognized as a
deduction from research and development costs at the time the
applicable company is entitled to such grants on the basis of
the research and development costs incurred.
23
ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
--------------------------------------------------------------------------------
U.S. dollars (In thousands)
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (CONT.)
U. INCOME TAXES
The Group accounts for income taxes in accordance with SFAS
No. 109, "Accounting for Income Taxes". This Statement
prescribes the use of the liability method whereby deferred
tax assets and liability account balances are determined based
on differences between financial reporting and tax bases of
assets and liabilities and are measured using the enacted tax
rates and laws that will be in effect when the differences are
expected to reverse. The Group provides a valuation allowance,
if necessary, to reduce deferred tax assets to their estimated
realizable value.
V. CONCENTRATION OF CREDIT RISKS
Financial instruments that potentially subject the Group to
concentrations of credit risk consist principally of cash and
cash equivalents, short and long-term deposits and trade
receivables.
The majority of the Group's cash and cash equivalents and
deposits are invested in dollar instruments with major banks
in Israel and in the United States Management believes that
the financial institutions that hold the Group investments are
financially sound, and accordingly, minimal credit risk exists
with respect to these investments.
The Group's trade receivables are derived primarily from sales
to large and stable customers and governments located mainly
in Israel, the United States and Europe. The Group performs
ongoing credit evaluations of its customers and to date, has
not experienced any unexpected material losses except for a
one-time loss in 2002 of approximately $4,600 due to the
insolvency of one of the Group's customers. An allowance for
doubtful accounts is determined with respect to those amounts
that the Group has determined to be doubtful of collection.
W. DERIVATIVE FINANCIAL INSTRUMENTS
Financial Accounting Standards Board Statement No. 133,
"Accounting for Derivative Instruments and Hedging Activities"
("SFAS No. 133"), requires companies to recognize all
derivative instruments as either assets or liabilities in the
statement of financial position at fair value. The accounting
for changes in the fair value (i.e. gains or losses) of a
derivative instrument depends on whether it has been
designated and qualifies as part of a hedging relationship and
further, on the type of hedging relationship. For those
derivative instruments that are designated and qualify as
hedging instruments, a company must designate the hedging
instrument, based upon the exposure being hedged, as a fair
value hedge, cash flow hedge or a hedge of a net investment in
a foreign operation.
For derivative instruments that are designated and qualify as
a fair value hedge (i.e., hedging the exposure to changes in
the fair value of an asset or a liability or an identified
portion thereof that is attributable to a particular risk),
the effective portion of the gain and loss on the
24
ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
--------------------------------------------------------------------------------
U.S. dollars (In thousands)
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (CONT.)
W. DERIVATIVE FINANCIAL INSTRUMENTS (Cont.)
derivative instrument as well as the offsetting loss or gain
on the hedged item attributable to the hedged risk are
recognized in the same line item associated with the hedged
item in current earnings during the period of the change in
fair value. The remaining gain or loss on the derivative
instrument in excess of the cumulative change in the fair
value of the asset or liability hedge, if any, is recognized
as financial expense in current earnings during the period of
change. For derivative instruments that are designated and
qualify as a cash flow hedge (i.e. hedging the exposure to
variability in expected future cash flows that is attributable
to a particular risk), the effective portion of the gain or
loss on the derivative instrument is reported as a component
of other comprehensive income and reclassified into earnings
in the same line item associated with the forecasted
transaction in the same period or periods during which the
hedged transaction affects earnings.
The remaining gain or loss on the derivative instrument in
excess of the cumulative change in the present value of future
cash flows of the hedged item, if any, is recognized as a
financial expense in current earnings during the period of
change.
For derivative instruments not designated as hedging
instruments, the gain or loss is recognized as a financial
expense in current earnings during the period of change.
As part of its hedging strategy, the Group enters into forward
exchange contracts in order to protect the Group from the risk
that the eventual dollar cash flows from the sale of products
to international customers will be adversely affected by
changes in the exchange rates.
As part of its cash flow hedging strategy the Group enters
into forward exchange contracts to hedge forecasted salary
expenses denominated in a currency other than the U.S. dollar.
As of December 31, 2005, the Group had forward contracts with
a notional amount of approximately $220,000 to purchase and
sell foreign currencies ($22,000 in Euro, $194,000 in Great
Britain Pounds ("GBP") and $4,000 in other currencies).
The fair value of the foreign exchange contracts and the
options as of December 31, 2005 is approximately $6,300.
X. STOCK-BASED COMPENSATION
Up until January 1, 2004, the Company elected to follow
Accounting Principles Board Opinion No. 25 ("APB 25")
"Accounting for Stock Issued to Employees" and FASB
Interpretation No. 44 ("FIN 44") "Accounting for Certain
Transactions Involving Stock Compensation" in accounting for
its employee stock option plans. Under APB 25, the Company
accounted for stock option grants using the intrinsic value
method whereby compensation expense is equal to the excess, if
any, of the quoted market price of the stock over the exercise
price at the grant date of the award or if applicable at a
subsequent measurement date. The Company recognized the
expense over the vesting period of the award
25
ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
--------------------------------------------------------------------------------
U.S. dollars (In thousands, except share and per share data)
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (CONT.)
X. STOCK-BASED COMPENSATION (Cont.)
on a straight-line basis. Phantom options were accounted for
as variable awards and accordingly, compensation expenses were
measured at the end of each reporting period and amortized on
an accelerated basis over the remaining vesting period (See
Note 18).
Effective January 1, 2004, the Company adopted the fair value
recognition provisions of SFAS No. 123. Under the modified
prospective method of adoption selected by the Company under
the provisions of SFAS No. 148, the recognition provisions are
applied to all employee awards granted, modified, or settled
after January 1, 2004, and to previously granted awards that
were not fully vested on the date of adoption. Compensation
cost is recorded over the vesting period on a straight-line
basis.
The cumulative effect on deferred taxes relating to stock
based compensation resulting from the adoption of SFAS No. 123
amounted to a reduction of $152 and was recorded as a one-time
adjustment to additional paid-in capital in 2004.
If the Company had elected to adopt the fair value recognition
provisions of SFAS No. 123 as of its original effective date,
pro forma net income and pro forma basic diluted net income
per share for the three years ended December 31, 2005 would be
as follows:
YEAR ENDED DECEMBER 31,
-------------------------------------------
2005 2004 2003
------------ ----------- ----------
Net income as reported $ 32,487 $ 51,873 $ 45,945
Add - Stock based compensation
expense (income), net of
related tax effects as reported
(intrinsic method in 2003) 172 2,710 3,793
Deduct - Stock based compensation
expense under fair value based
method of SFAS 123 net of related
of tax effects (172) (2,710) (2,956)
------------ ----------- ----------
Pro forma net income $ 32,487 $ 51,873 $ 46,782
============ =========== ==========
Net earnings per share:
Basic net earnings per share as
reported $ 0.80 $ 1.30 $ 1.18
============ =========== ==========
Diluted net earnings per share as
reported $ 0.78 $ 1.26 $ 1.14
============ =========== ==========
Pro forma basic net earnings per share $ 0.80 $ 1.30 $ 1.20
============ =========== ==========
Pro forma diluted net earnings per share $ 0.78 $ 1.26 $ 1.16
============ =========== ==========
26
ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
--------------------------------------------------------------------------------
U.S. dollars (In thousands)
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (CONT.)
X. STOCK-BASED COMPENSATION (Cont.)
The fair value for these options was estimated using a
Black-Scholes option pricing model with the following weighted
average assumptions:
2005 2004 2003
------------- ------------------ --------------
Divided yield 2.25% 2.2% 2.19%
Expected volatility 25.6% 26.7% 19.03%
Risk-free interest rate 4.5% 4% 1.20%
Expected life 4 years 4 years 6 years
Y. FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amount reported in the balance sheet for cash and
cash equivalents, short-term bank deposits, trade receivables,
short-term bank credit and loans and trade payables
approximate their fair values due to the short-term maturities
of such instruments.
The carrying amount of the trading securities is recorded
according to its fair market value, as determined by quoted
market prices on the stock exchange.
Long-term loans are estimated by discounting the future cash
flows using current interest rates for loans of similar terms
and maturities. The carrying amount of the long-term loans
approximates their fair value.
The fair value of foreign currency contracts (used for hedging
purposes) is estimated by obtaining current quotes from
investment bankers.
It was not practicable to estimate the fair value of the
Group's investments in shares of non-public companies that are
accounted for under the cost and equity method because of the
lack of a quoted market price and the inability to obtain
valuation of each company without incurring excessive costs.
The carrying amounts of these companies as of December 31,
2004 and 2005 were $44,869 and $45,197, respectively, and
represent the original cost of acquisition, and in the case of
affiliates also the Company's equity in the earnings/losses of
the affiliates and its share in the changes of the affiliates'
equity since the dates of acquisition. As noted in Note H
above, management is constantly monitoring such investments
for other-than-temporary decline in value.
Z. BASIC AND DILUTED NET EARNINGS PER SHARE
Basic net earnings per share are computed based on the
weighted average number of ordinary shares outstanding during
each year. Diluted net earnings per share is computed based on
the weighted average number of ordinary shares outstanding
during each year, plus dilutive potential ordinary shares
considered outstanding during the year. Outstanding stock
options are excluded from the calculation of the diluted net
earnings per ordinary share when such securities are
anti-dilutive. In all the years presented no stock options
were excluded.
27
ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
--------------------------------------------------------------------------------
U.S. dollars (In thousands)
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (CONT.)
AA. VARIABLE INTEREST ENTITIES
FASB Interpretation No. 46, "Consolidation of Variable
Interest Entities, an interpretation of Accounting Research
Bulleting No. 51" ("FIN 46") provides a new framework for
identifying Variable Interest Entities ("VIE's") and
determining when a company should include the assets,
liabilities, non-controlling interests and results of
activities of a VIE in its consolidated financial statements.
In general, a VIE is an entity that either (1) has an
insufficient amount of equity to carry out its principal
activities, without additional subordinated financial support,
(2) has a group of equity owners that are unable to make
significant decisions about the entity's activities, or (3)
has a group of equity owners that do not have the obligation
to absorb the entity's losses or the right to receive returns
generated by its operations. FIN 46 requires the consolidation
of a VIE by the primary beneficiary. The primary beneficiary
is the entity that absorbs a majority of the entity's expected
losses, receives a majority of the entity's expected residual
returns, or both, as a result of ownership, contractual or
other financial interests in the entity.
U-TacS is considered to be a variable interest entity. As the
Company is the primary beneficiary, U-TacS is consolidated in
the Company's financial statements.
AB. IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
(1) On December 2004, the FASB issued the revised FAS No.
123, "Share-Based Payment" ("FAS 123(R)"), which
addresses the accounting for share-based payment
transactions in which the Company obtains employee
services in exchange for: (a) equity instruments of
the Company; or (b) liabilities that are based on the
fair value of the Company's equity instruments or
that may be settled by the issuance of such equity
instruments. This Statement eliminates the ability to
account for employee share-based payment transactions
using APB 25, "Accounting for Stock Issued to
Employees", and requires instead that such
transactions be accounted for using the grant-date
fair value based method. This Statement was to have
been effective as of the beginning of the first
interim or annual reporting period that commences
after June 15, 2005 (July 1, 2005 for the Company);
however, on April 14, 2005, the United States
Securities and Exchange Commission ("SEC") delayed
effectiveness for companies with fiscal years ending
December 31 (such as the Company) to January 1, 2006.
This Statement applies to all awards granted or
modified after the Statement's effective date. In
addition, compensation cost for the unvested portion
of previously granted awards that remain outstanding
on the Statement's effective date shall be recognized
on or after the effective date, as the related
services are rendered, based on the awards'
grant-date fair value as previously calculated for
the pro-forma disclosure under SFAS 123. In March
2005, the SEC released SEC staff Accounting Bulletin
No.107 (SAB 107), "Share-Based Payment" (SAB 107").
SAB 107 provides the SEC staff's position regarding
the application of statement 123(R) and contains
interpretive guidance related to the interaction
between Statement 123(R) and certain SEC rules and
regulations and also provides the SEC staff's views
regarding the valuation of share-based payment
arrangements for public companies.
28
ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
--------------------------------------------------------------------------------
U.S. dollars (In thousands)
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (CONT.)
AB. IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS (Cont.)
(2) The Company adopted the fair-value-based method of
accounting for share-based payments effective January
1, 2004 using the "modified prospective method"
described in FASB Statement No. 148, "Accounting for
Stock-Based Compensation - Transition and
Disclosure". Currently, the Company uses the
Black-Scholes-Merton formula to estimate the value of
stock options granted to employees. The Company does
not anticipate that adoption of SFAS 123(R) and SAB
107 will have a material impact on its results of
operations or its financial position. However, SFAS
123(R) also requires that the benefits of tax
deductions in excess of recognized compensation cost
be reported as a financing cash flow, rather than as
an operating cash flow as required under current
literature. This requirement will reduce net
operating cash flows and increase net financing cash
flows in periods after the effective date. While the
Company cannot estimate what those amounts will be in
the future (because they depend on, among other
things, when employees exercise stock options), the
amount of operating cash flows recognized in prior
periods for such excess tax deductions was $652,
$1,179 and $758 in 2005, 2004 and 2003, respectively.
(3) In May 2005, the FASB issued Statement of Financial
Accounting Standard No. 154 ("FAS 154"), "Accounting
Changes and Error Corrections" - a replacement of APB
No. 20, Accounting Changes" and FAS No. 3, "Reporting
Accounting Changes in Interim Financial Statements".
FAS 154 provides guidance on the accounting for and
reporting of accounting changes and error
corrections. APB Opinion 20 previously required that
most voluntary changes in accounting principle be
recognized by including in net income of the period
of the change the cumulative effect of changing to
the new accounting principle. FAS 154 requires
retrospective application to prior periods' financial
statements of a voluntary change in accounting
principle unless it is impracticable to do so. FAS
154 is effective for accounting changes and
corrections of errors made in fiscal years beginning
after December 15, 2005.
(4) In June 2005, the Emerging Issues Task Force ("EITF")
released Issue No. 04-5 "Determining Whether a
General Partner, or the General Partner as a Group,
Controls a Limited Partnership or Similar Entity When
the Limited Partners Have Certain Rights" ("EITF
04-5"). EITF 04-5 provides guidance in determining
whether a general partner controls a limited
partnership and therefore should consolidate the
limited partnership. EITF 04-5 states that the
general partner in a limited partnership is presumed
to control that limited partnership and that the
presumption may be overcome if the limited partners
have either (1) the substantive ability to dissolve
or liquidate the limited partnership or otherwise
remove the general partner without cause or (2)
substantive participating rights. The effective date
for applying the guidance in EITF 04-5 was (1) June
29, 2005 for all new limited partnerships and
existing limited partnerships for which the
partnership agreement was modified after that date
and (2) no later than the beginning of the first
reporting period in fiscal years beginning after
December 15, 2005, for all other limited
partnerships.
The Company estimates that the adoption of EITF 04-5
will not have a significant impact on its financial
position.
29
ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
--------------------------------------------------------------------------------
U.S. dollars (In thousands)
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (CONT.)
AB. IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS (Cont.)
(5) In November 2005, the FASB issued FSP FAS 115-1. The
FSP addresses the determination as to when an
investment is considered impaired, whether that
impairment is other than temporary and the
measurement of an impairment loss. The FSP also
includes accounting considerations subsequent to the
recognition of other than-temporary impairment and
requires certain disclosures about unrealized losses
that have not been recognized as other-than-temporary
impairments. The guidance in this FSP amends SFAS No.
115, "Accounting for Certain Investments in Debt and
Equity". The FSP replaces the impairment evaluation
guidance of EITF Issue No. 03-1, "The Meaning of
Other-Than-Temporary Impairment and Its Application
to Certain Investments", with references to the
existing other-than-temporary impairment guidance.
The FSP clarifies that an investor should recognize
an impairment loss no later than when the impairment
is deemed other-than-temporary, even if a decision to
sell an impaired security has not been made. The
guidance in this FSP is to be applied to reporting
periods beginning after December 15, 2005. As of
December 31, 2005, adoption of FSP FAS 115-1 has not
had a material impact on the Company's financial
position or results of operations.
AC. RECLASSIFICATIONS
Certain financial statement data for prior years has been
reclassified to conform to current year financial statement
presentation.
30
ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
--------------------------------------------------------------------------------
U.S. dollars (In thousands)
NOTE 3 - TRADE RECEIVABLES, NET
Trade receivables
DECEMBER 31,
---------------------------------
2005 2004
---------------- ----------------
Open accounts (*) $ 254,056 $ 176,163
Unbilled receivables 95,854 41,717
Less - allowance for doubtful accounts (3,221) (3,064)
---------------- ----------------
$ 346,689 $ 214,816
================ ================
(*) Includes affiliated companies $ 6,283 $ 10,823
================ ================
NOTE 4 - OTHER RECEIVABLES AND PREPAID EXPENSES
DECEMBER 31,
---------------------------------
2005 2004
---------------- ----------------
Deferred income taxes $ 18,708 $ 21,355
Prepaid expenses 22,065 16,621
Government institutions 9,451 5,719
Employees 1,029 1,204
Others 15,843 6,895
---------------- ----------------
$ 67,096 $ 51,794
================ ================
NOTE 5 - INVENTORIES, NET OF ADVANCES
DECEMBER 31,
---------------------------------
2005 2004
---------------- ----------------
Cost incurred on long-term contracts in progress $ 311,800 $ 254,009
Raw materials 84,343 70,813
Advances to suppliers and subcontractors 40,095 21,164
---------------- ----------------
436,238 345,986
Less -
Cost incurred on contracts in progress deducted
from customer advances 16,178 14,533
---------------- ----------------
420,060 331,453
Less -
Advances received from customers (*) 84,083 75,776
Provision for losses 7,549 7,636
---------------- ----------------
$ 328,428 $ 248,041
================ ================
The Company has transferred legal title of inventories to certain
customers as collateral for advances received.
(*) Advances are allocated to the relevant inventories on a
per-project basis. In cases (projects) where the advances are in
excess of the inventories, the net amount is presented as a
liability. In cases where the inventories are in excess of
advances received, the net amount is included in inventories.
31
ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
--------------------------------------------------------------------------------
U.S. dollars (In thousands)
NOTE 6 - INVESTMENTS IN AFFILIATED COMPANIES, PARTNERSHIP AND OTHER COMPANIES
A. INVESTMENTS IN COMPANIES ACCOUNTED FOR UNDER THE EQUITY METHOD:
DECEMBER 31,
---------------------------------
2005 2004
---------------- ----------------
Tadiran (1) $ 156,142 $ 14,749
SCD (2) 25,059 $ 19,186
VSI (3) 6,451 6,966
RedC (4) - 3,100
Opgal (5) 3,380 2,873
Chip PC (6) 2,516 -
Others (8) 1,446 999
---------------- ----------------
$ 194,994 $ 47,873
================ ================
(1) Tadiran Communications Ltd. ("Tadiran") - a
publicly-traded 40%-owned subsidiary registered in
Israel, is involved in the worldwide market for
military communications systems and equipment and is
also active in the civilian communications market.
(2) Semi Conductor Devices ("SCD") is an Israeli
partnership, held 50% by the Company and 50% by
Rafael Armaments Development Authority Ltd.
("Rafael"). SCD is engaged in the development and
production of various thermal detectors and laser
diodes. SCD is jointly controlled and therefore is
not consolidated in the Company's financial
statements.
(3) Vision Systems International LLC ("VSI") based in San
Jose, is a California limited liability company that
is held 50% by ESA and 50% by a subsidiary of
Rockwell Collins Inc. VSI operates in the area of
helmet mounted display systems for fixed wing
military and paramilitary aircraft. VSI is jointly
controlled and therefore is not consolidated in the
Company's financial statements.
(4) RedC Optical Networks Inc. ("RedC"), a company
registered in Delaware, is engaged in the multi-focal
optic communications sector and as of December 31,
2003 was held 36.5% by El-Op. RedC designs develops
and manufactures optical amplifiers for dense
wave-length multiplexing optical networks for
telecommunications.
In November 2004, El-Op acquired all of the
outstanding voting Preferred A shares of RedC from
MRV Communications Inc. for a consideration of
$2,000, in accordance with El-Op's right of first
refusal based on the Preferred A shares investment
agreement. Prior to the acquisition, El-Op held 57%
of the ordinary shares of RedC which reflected 36.5%
of its voting rights. Following the acquisition,
El-Op held 57% of the ordinary shares and 100% of the
Preferred A shares, which reflected 72.5% of RedC's
voting rights.
32
ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
--------------------------------------------------------------------------------
U.S. dollars (In thousands)
NOTE 6 - INVESTMENTS IN AFFILIATED COMPANIES, PARTNERSHIP AND OTHER COMPANIES
(CONT.)
A. INVESTMENTS IN COMPANIES ACCOUNTED FOR UNDER THE EQUITY METHOD
(CONT.)
In December 2004, El-Op signed a Transfer Agreement
for selling all of its holdings in RedC, including
the Ordinary shares and Preferred A shares, in
consideration for $3,100, which was paid in cash on
the closing date in January 2005. The closing was
subject to certain conditions, which were all met by
January 21, 2005. In January 2005, El-Op sold its
shares in RedC for $3,100 in cash.
El-Op allocated the purchase price to the fair value
of the assets acquired and liabilities assumed.
Such allocation resulted in negative goodwill
amounting to approximately to $1,100. Since RedC had
no assets which could be reduced by the negative
goodwill, according to the provisions of FAS 141,
this goodwill was recorded as other income in the
financial statements.
(5) Opgal Optronics Industries Ltd. ("Opgal") is an
Israeli company owned 50.1% by the Company and 49.9%
by a subsidiary of Rafael. Opgal focuses mainly on
commercial applications of thermal imaging and
electro-optic technologies. The Company jointly
controls Opgal with Rafael, and therefore Opgal is
not consolidated in the Company's financial
statements.
(6) Chip PC is an Israeli company, of which approximately
20% is held by the Company. Chip PC develops and
manufactures "Post PC" solutions, focused on enabling
server-based-computing technologies to replace
traditional PCs and deploy and control large numbers
of workstations.
(7) Mediguide Inc. ("Mediguide") and its Israeli
subsidiary, Mediguide Ltd., were established in 2000
as a spin-off from the Company. The share capital of
Mediguide consists of Common shares and Preferred A,
B, C and D shares. The Common shares and the
Preferred shares, both have voting rights. The
Company holds all of the Common shares of Mediguide
which constitute approximately 55% (41% on a fully
diluted basis) of the voting rights of Mediguide.
During 2001 - 2004, Mediguide issued Preferred shares
to other investors in consideration for approximately
$34,355. The Preferred shares issued entitle the
other investors to preference rights senior to all
other classes of shares previously issued by
Mediguide in a liquidation or a deemed liquidation
event. Therefore, the Company did not record any gain
as a result of the above transaction. In addition,
the Preferred shares entitle their holders to certain
participating rights. Accordingly, based on the
guidance in EITF 96-16, the Company does not
consolidate Mediguide. The carrying value of the
investment in Mediguide is zero.
33
ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
--------------------------------------------------------------------------------
U.S. dollars (In thousands)
NOTE 6 - INVESTMENTS IN AFFILIATED COMPANIES, PARTNERSHIP AND OTHER COMPANIES
(CONT.)
A. INVESTMENTS IN COMPANIES ACCOUNTED FOR UNDER THE
EQUITY METHOD (CONT.)
(8) The summarized financial information
regarding Tadiran (see Note 1(G)) is as
follows:
Balance Sheet Information:
DECEMBER 31,
---------------------
2005 2004
-------- --------
Current assets $312,093 $296,668
Non-current assets 104,118 117,716
-------- --------
Total assets 416,211 414,384
======== ========
Current liabilities 243,972 258,138
Non-current liabilities 43,840 36,097
Shareholders' equity 128,399 120,149
-------- --------
$416,211 $414,384
======== ========
Income Statement Information:
YEAR ENDED DECEMBER 31,
---------------------
2005 2004
-------- --------
Revenues $271,424 $316,036
Gross profit 120,510 158,981
Net income 29,879 47,992
34
ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
--------------------------------------------------------------------------------
U.S. dollars (In thousands)
NOTE 6 - INVESTMENTS IN AFFILIATED COMPANIES, PARTNERSHIP AND OTHER COMPANIES
(CONT.)
A. INVESTMENTS IN COMPANIES ACCOUNTED FOR UNDER THE EQUITY METHOD
(CONT.)
(9) The summarized aggregate financial information of
companies accounted for under the equity method,
excluding Tadiran (see Note 6(A) (8)) is as follows:
Balance Sheet Information:
DECEMBER 31,
---------------------
2005 2004
-------- --------
Current assets $138,312 $124,352
Non-current assets 19,115 21,646
-------- --------
Total assets 157,427 145,998
======== ========
Current liabilities 59,067 68,655
Non-current liabilities 13,622 3,868
Shareholders' equity 84,738 73,475
-------- --------
$157,427 $145,998
======== ========
Income Statement Information:
YEAR ENDED DECEMBER 31,
----------------------------------
2005 2004 2003
-------- -------- --------
Revenues $266,841 $213,680 $183,426
Gross profit 63,938 55, 285 45,616
Net income 13,345 15,195 13,976
(10) See Note 17(F) for guarantees.
35
ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
--------------------------------------------------------------------------------
U.S. dollars (In thousands)
NOTE 6 - INVESTMENTS IN AFFILIATED COMPANIES, PARTNERSHIP AND OTHER COMPANIES
(CONT.)
B. INVESTMENTS IN COMPANIES ACCOUNTED FOR UNDER THE COST
METHOD
DECEMBER 31,
-------------------
2005 2004
------- -------
Sultam (1) $ 3,500 $ 3,500
ISI (2) 1,830 7,230
AAI (3) 1,000 1,000
Others 15 15
------- -------
$ 6,345 $11,745
======= =======
(1) Sultam Systems Ltd. ("Sultam"), held 10%, is an
Israeli company engaged in the development and
manufacturing of military systems in the artillery
sector.
(2) ImageSat International N.V. ("ISI"), held 14% (10% on
a fully diluted basis), is engaged in the operation
of satellite photography formations and commercial
delivery of satellite photography for civil purposes.
During the fourth quarter of 2005, the fair value of
ISI decreased as a result of a decrease in ISI's
backlog and estimated future cash flows. Based on a
valuation performed by an independent advisor, the
Company wrote-off approximately $5,400 of its
investment in ISI.
(3) AeroAstro Inc. ("AAI"), held 8.33% (on a fully
diluted basis) is a Delaware corporation engaged in
innovative micro and nanospacecraft applications. AAI
manufactures low-cost satellite systems and
components, used in its own spacecraft and for
spacecraft development in and outside the U.S.
NOTE 7 - COMPENSATION RECEIVABLES IN RESPECT OF FIRE DAMAGE
DECEMBER 31,
2005
-----------------------
Receivables from insurance company (A) 25,884
Net of contingent to Koor (B) 10,354
-----------------------
15,530
=======================
A. On March 17, 2001, a fire broke out in the manufacturing
plants in two of Elisra's subsidiaries ("the companies"). The
fire caused damage to equipment, building, inventory and work
in progress. The book value of the equipment, inventory and
costs invested in the work in progress damaged by the fire
together with the costs of repairing the building and other
costs, are estimated at approximately $36 million. Up to
December 31, 2005, advances were received from the insurance
company in the aggregate amount of approximately $10 million.
36
ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
--------------------------------------------------------------------------------
U.S. dollars (In thousands)
NOTE 7 - COMPENSATION RECEIVABLES IN RESPECT OF FIRE DEMAGE (CONT.)
The claim submitted by the companies to the insurance company
and which is based on the terms of the insurance policy, also
includes a demand for consequential damages along with other
damages that the companies believe are covered by the
insurance policy. Therefore, the total amount of the claim is
much higher than the book value of the damage and the cost of
repairing the building.
The companies are taking legal action in order to receive the
insurance amounts and they have also submitted a claim to the
District Court of Tel-Aviv against the insurance company and
its assessors, in the aggregate amount of $96 million. In
light of the duration of the proceedings, the managements of
the companies decided to classify the balance of the
compensation receivable from the insurance company as a
long-term receivable.
In April 2004, the companies filed a request with the Court,
for issuance of a partial judgment, in the amount of $33
million (in excess of the advances already paid by the
insurance company) based on the admission made by the
insurance company and its representatives of an obligation
deriving from the insurance event, while the dispute is
regarding the amount of the damages.
In December 2004, a hearing was held in the Court wherein the
force of a judgment was given to an agreement of the parties
pursuant to which a separate bank account will be opened, in
which the insurance company will deposit $15 million. Every
withdrawal from such account requires approval of the Court
until the proceedings on the claim are concluded. In
accordance with the aforesaid agreement, the claim was
transferred for mediation, and during this time the Court
proceedings in the matter have been postponed. At the balance
sheet date the mediation process has not yet been concluded.
In the opinion of the companies, based on, among other things,
the opinion of their legal advisors regarding this matter, it
is difficult at this stage to estimate the chances that the
companies will receive the full amount of the claim, even
though it is considered to be well founded. Nonetheless, the
managements of the companies estimate, based, on the opinion
of their legal advisors that the chances are good of receiving
indemnification from the insurance company, in an amount
greater than the balance of the receivable which they recorded
as an asset in the financial statements.
B. In the agreement the Company signed with Koor, for the
purchase of Elisra's shares, it was agreed that the Company
will pay Koor 40% of the consideration received from the
insurance company, up to consideration of $30 million and
25-27.5% for additional consideration received (see Note
1(H)).
37
ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
--------------------------------------------------------------------------------
U.S. dollars (In thousands)
NOTE 8 - LONG-TERM BANK DEPOSITS AND TRADE RECEIVABLES
DECEMBER 31,
---------------------------------
2005 2004
---------------- ----------------
Deposits with banks for loans granted to employees (*) $ 1,200 $ 1,603
Long-term trade receivables 1,219 452
Other deposits with banks 38 47
---------------- ----------------
$ 2,457 $ 2,102
================ ================
(*) The deposits are linked to the Israeli CPI, bear annual
interest of 4% and are presented net of current
maturities of $539 (2004 - $534).
NOTE 9 - PROPERTY, PLANT AND EQUIPMENT, NET
DECEMBER 31,
---------------------------------
2005 2004
---------------- ----------------
Cost (1):
Land, buildings and leasehold improvements (2) $ 177,434 $ 151,432
Instruments, machinery and equipment (3) 333,527 222,313
Office furniture and other 37,836 26,521
Motor vehicles 49,538 37,308
---------------- ----------------
598,335 437,574
Accumulated depreciation (313,338) (193,286)
---------------- ----------------
Depreciated cost $ 284,997 $ 244,288
================ ================
Depreciation expenses for the years ended December 31, 2005, 2004 and
2003 amounted to $44,576, $35,001 and $30,775, respectively.
(1) Net of investment grants received (mainly for instruments,
machinery and equipment) in the amounts of approximately $
32,879 and $29,800 as of December 31, 2005 and 2004,
respectively.
(2) Includes, rights in approximately 9,225 square meters of land
in Tirat Hacarmel, Israel. The land is leased from the Israel
Land Administration until the years 2014 to 2024 with a
renewal option for additional periods of up to 49 years. The
Company's rights in the land have not yet been registered in
its name.
Includes rights in approximately 10,633 square meters of land
in Rehovot, Israel. The land is leased from the Israel Land
Administration until the year of 2043 with a renewal option
for additional periods of up to 49 years. The Company's rights
in the land have not yet been registered in its name.
Includes rights in approximately 10,386 square meters of land
in Bnei Brak, Israel. The land is leased from the Israel Land
Administration until the year of 2022 with a renewal option
for additional periods of up to 49 years. The Company's rights
in the land have not yet been registered in its name.
38
ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
--------------------------------------------------------------------------------
U.S. dollars (In thousands)
NOTE 9 - PROPERTY, PLANT AND EQUIPMENT, NET (CONT.)
(3) Includes equipment produced by the Group for its own use in
the aggregate amount of $82,518 and $69,146 as of December 31,
2005 and 2004, respectively.
(4) As for pledges of assets - see Note 17(I).
NOTE 10 - INTANGIBLE ASSETS, NET
A.
WEIGHTED AVERAGE NUMBER
OF YEARS OF AMORTIZATION DECEMBER 31,
------------------------------- --------------------------------------
2005 2004
--------- -----------
Original cost:
Technology (1) 14 $ 108,786 $ 84,554
Trade marks (2) 17 8,000 8,000
--------- -----------
116,786 92,554
--------- -----------
Accumulated amortization:
Technology 35,707 28,365
Trade marks 2,308 1,908
--------- -----------
38,015 30,273
--------- -----------
Amortized cost $ 78,771 $ 62,281
========= ===========
Goodwill (3) $ 63,957 $ 33,706
========= ===========
(1) The technology acquired consists of five major items as
follows:
In 2000, the Company completed a merger with El-Op. A portion
of the purchase price was allocated to technology ($45,000),
based on an independent appraisal. The technology acquired in
the merger with El-Op comprises various technologies relating
to:
a. Diode pumped and other advanced solid-state lasers
incorporating add-on eye-safety options.
b. Detectors for thermal imaging devices, including 2-D
arrays for second and third generation forward
looking infrared sensors.
c. Line of sight command, control and stabilization
systems employing computerized digital controllers.
d. Sophisticated image and signal processing, utilizing
modern equipment and software.
e. High precision mechanical and optical component
design and manufacturing for the visible, ultraviolet
and infrared spectra, including special and exotic
materials, diffractive and planar optics, space borne
lightweight optics and multi-layer coatings.
f. Aviation instruments such as precision altimeters and
air speedometers.
39
ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
--------------------------------------------------------------------------------
U.S. dollars (In thousands)
NOTE 10 - INTANGIBLE ASSETS, NET (CONT.)
In 2000, EFW Inc. acquired from Honeywell Inc.,
Honeywell's business relating to head-up displays and
tracking systems for pilot helmets. An amount of
$9,300 was allocated to the acquired technology based
on its estimated fair value as prepared by the
Company.
In 2001 and 2002, the Company acquired a Brazilian
company which serves as a center for the production
and logistic support of defense electronics programs
in Brazil. An amount of $5,500 was allocated to
technology related to the maintenance and support of
avionic equipment.
In 2002, the Company acquired the business of the
Defense Systems Division of Elron Telesoft in
consideration for $5,700. An amount of $5,100 was
allocated to the technology related to the government
information technology control systems software
developed by Elron Telesoft.
In 2005, the Company acquired 70% of Elisra's shares
as detailed in Note 1(H) above, in consideration for
$68,800. An amount of $21,300 was allocated to the
technology related to electronic warfare (EW)
systems, command communication (C(2)) systems and
data link products.
(2) Includes trade marks acquired in the merger with
El-Op in 2000.
(3) Includes mainly goodwill resulting from the merger
with El-Op ($34,200) in 2000, goodwill acquired from
Honeywell Inc. ($1,800) in 2000 and goodwill
resulting from the acquisition of Elisra ($29,900) in
2005.
B. Amortization expenses amounted to $7,742, $7,260 and $7,222
for the years ended December 31, 2005, 2004 and 2003,
respectively.
C. The annual amortization expense relating to intangible assets
other then goodwill existing as of December 31, 2005 is
estimated to be approximately as follows:
2006 $ 8,200
2007 8,100
2008 7,800
2009 7,200
2010 6,500
Thereafter 41,000
--------
Total $ 78,800
========
40
ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
--------------------------------------------------------------------------------
U.S. dollars (In thousands)
NOTE 11 - SHORT-TERM BANK CREDIT AND LOANS
DECEMBER 31,
----------------------------------------------------------------
2005 2004 2005 2004
---------------- ----------------
Short-term bank loans: Interest Rate
-------------------------------
In U.S. dollars 6-6.2% 4.2-4.6% $ 17,491 $ 3,967
---------------- ----------------
Short-term bank credit:
In NIS unlinked 5.8% 5.7-8.1% 2,828 2,120
In U.S. dollars 6-6.4% 4.4% 9,977 2,505
---------------- ----------------
12,805 4,625
---------------- ----------------
$ 30,296 $ 8,592
================ ================
Weighted Average Interest Rate 5.9% 4.7%
NOTE 12 - OTHER PAYABLES AND ACCRUED EXPENSES
DECEMBER 31,
---------------------
2005 2004
-------- --------
Payroll and related expenses $ 65,400 $ 42,491
Provision for vacation pay 32,879 26,936
Provision for income taxes, net of advanced paid 8,041 14,681
Provisions for royalties 22,943 20,638
Provision for warranty 31,797 34,230
Deferred income taxes 2,140 -
Cost provisions and others (*) 53,339 33,133
-------- --------
$216,539 $172,109
======== ========
(*) The other cost provision, primarily includes provisions for
estimated future costs in respect of potential contractual penalties
and the probable loss from claims (legal or unasserted) in the ordinary
course of business (e.g. damages caused by the items sold and claims as
to the specific products ordered).
NOTE 13 - CUSTOMERS ADVANCES AND AMOUNTS IN EXCESS OF COSTS INCURRED ON
CONTRACTS IN PROGRESS
DECEMBER 31,
---------------------
2005 2004
-------- --------
Advances received $460,242 $180,738
Less -
Advances presented under long-term liabilities 122,263 10,320
Advances deducted from inventories 84,083 75,776
-------- --------
253,896 94,642
Less -
Costs incurred on contracts in progress 16,178 14,533
-------- --------
$237,718 $ 80,109
======== ========
As for guarantees and liens see Note 17(F).
41
ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
--------------------------------------------------------------------------------
U.S. dollars (In thousands)
NOTE 14 - LONG-TERM LOANS
INTEREST YEARS OF DECEMBER 31,
CURRENCY % MATURITY 2005 2004
-------- -------- -------- ---- ----
Libor + mainly
Banks U.S. dollars 0.8%-2.3% 2-3 $ 229,370 $ 83,469
Office of Chief NIS-linked to
Scientist the Israeli-CPI 3.2% 2 2,713 4,131
Other 254 290
--------- --------
232,337 87,890
Less-current maturities 7,355 1,656
--------- --------
$ 224,982 $ 86,234
========= ========
The Libor rate as of December 31, 2005 was 3.2%.
The maturities of these loans after December 31, 2005 are as follows:
2006 - current maturities $ 7,355
2007 210,161
2008 9,865
2009 2,170
-------------
2010 and thereafter 2,611
-------------
$ 232,337
=============
See Note 17(G) for covenants.
During 2004, a subsidiary of the Company consolidated its long-term
debt. As a result, all of the prior bank loans outstanding were paid in
full. The Company's subsidiary increased this line during 2005 and
maintains a single revolving credit facility of $120,000. The
outstanding balance as of December 31, 2005 was $5,700. The stated
interest rate on this facility is 7.25% Prime on $2,200 and Euro/Libor
rate 4.4 + .75% on the Euro Loan Balance of $3,500. The note is
scheduled to be renewed in 2007.
NOTE 15 - BENEFIT PLANS
ESA, the Company's subsidiaries in the U.S., has adopted for its
employees in the U.S. benefits plans as follows:
DEFINED BENEFIT RETIREMENT PLAN
ESA has two defined benefit pension plans (the "Plans") substantially
covering its employees in the U.S. Monthly benefits are based on years
of benefit service and annual compensation. Annual contributions to the
Plans are determined using the unit credit actuarial cost method and
are equal to or exceed the minimum required by law. Pension fund assets
of the Plans are invested primarily in stock, bonds and cash by a
financial institution, as the investment manager of the Plans' assets.
42
ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
--------------------------------------------------------------------------------
U.S. dollars (In thousands)
NOTE 15 - BENEFIT PLANS (CONT.)
The following table reconciles the benefit obligations, Plans assets,
funded status and net asset (liability) information of the Plans:
DECEMBER 31,
-----------------------
2005 2004
-------- --------
Benefit obligation at beginning of year $ 42,698 $ 34,965
Service cost 3,242 3,000
Interest cost 2,543 2,191
Amendments 321 -
Actuarial losses 3,516 2,308
Unrecognized transition obligation - 1,056
Benefits repaid (1,015) (822)
-------- --------
Benefit obligation at end of year $ 51,305 $ 42,698
======== ========
Plans assets at beginning of year 25,102 21,196
Actual return on Plan assets 1,215 1,756
Contributions by employer 8,042 2,972
Benefits repaid (1,015) (822)
-------- --------
Plans assets at end of year $ 33,344 $ 25,101
======== ========
Funded status of Plans (underfunded) (17,962) (17,595)
Unrecognized prior service cost 156 180
Unrecognized transition obligation - 1,056
Unrecognized net actuarial loss 15,480 11,447
-------- --------
Net amount recognized $ (2,326) $ (5,272)
======== ========
Net asset (liability) consists of:
Accrued benefit liability $(13,700) $(13,899)
Intangible asset 157 895
Accumulated other comprehensive income 11,217 7,732
-------- --------
Net amount recognized $(2,326) $ (5,272)
======== ========
Weighted average assumptions:
Discount rate as of December 31, 5.75% 6.00%
Expected long-term rate of return on Plan's assets 8.50% 8.50%
Rate of compensation increase 3.00% 3.00%
YEAR ENDED DECEMBER 31,
---------------------------------
2005 2004 2003
------- ------- -------
Components of net periodic pension cost:
Service cost $ 3,242 $ 3,000 $ 2,480
Interest cost 2,543 2,191 1,921
Expected return on Plans' assets (2,133) (1,951) (1,573)
Amortization of prior service cost (15) (15) (15)
Amortization of transition amount 69 - -
Recognized net actuarial loss 569 451 339
------- ------- -------
Net periodic pension cost $ 4,275 $ 3,676 $ 3,152
======= ======= =======
43
ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
--------------------------------------------------------------------------------
U.S. dollars (In thousands)
NOTE 15 - BENEFIT PLANS (CONT.)
YEAR ENDED DECEMBER 31,
--------------------------------------------------
2005 2004 2003
-------------- -------------- --------------
Additional information:
Accumulated benefit obligation $ 47,043 $ 39,001 $ 32,207
============== ============== ==============
Increase in minimum liability included in other
comprehensive income $ 3,486 $ 1,341 $ 1,392
============== ============== ==============
ASSET ALLOCATION BY CATEGORY
2005 2004
-------------- --------------
Asset Category
Equity Securities 65.9% 62.4%
Debt Securities 26.4% 28.5%
Other 7.7% 9.1%
-------------- --------------
Total 100.0% 100.0%
The investment policy of ESA is directed toward a broad range of
securities. The diversified portfolio seeks to maximize investment
return while minimizing the risk levels associated with investing. The
investment policy is structured to consider the retirement plan's
obligations and the expected timing of benefit payments. The target
asset allocation for the Plan years presented is as follows:
2005 2004
-------------- --------------
Asset Category
Equity Securities 60.0% 60.0%
Debt Securities 37.0% 37.0%
Other 3.0% 3.0%
-------------- --------------
Total 100.0% 100.0%
In developing the overall expected long-term rate of return on assets
assumption, ESA used a building block approach in which rates of return
in excess of inflation were considered separately for equity
securities, debt securities, real estate and all other assets. The
excess returns were weighted by the representative target allocation
and added along with an approximate rate of inflation to develop the
overall expected long-term rate of return.
It is the policy of ESA to, at least, meets the ERISA minimum
contribution requirements for a plan year. The minimum contribution
requirements for the 2005 Plan year and the quarterly contributions
requirements for the 2005 Plan year have been satisfied as of December
31, 2005. However, ESA anticipates that it will make an additional
discretionary contribution of approximately $3,400 during 2006 in order
to increase the Plan's funded current liability percentage. Benefit
payments over the next five years are expected to be $1,384 in 2006;
$1,566 in 2007; $1,744 in 2008; $2,024 in 2009 and $2,334 in 2010.
44
ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
--------------------------------------------------------------------------------
U.S. dollars (In thousands)
NOTE 15 - BENEFIT PLANS (CONT.)
DEFINED CONTRIBUTION PLAN
The 401(k) savings plan ("401(k) plan") is a defined contribution
retirement plan that covers all eligible employees, as defined in
section 401(k) of the U.S. Internal Revenue Code. ESA's employees may
elect to contribute a percentage of their annual gross compensation to
the 401(k) plan. ESA may make discretionary matching contributions as
determined by the subsidiary. Total expense under the 401(k) plan
amounted to $1,984 for the year ended December 31, 2005 (2004 - $1,744,
2003 - $1,629).
NOTE 16 - TAXES ON INCOME
A. APPLICABLE TAX LAWS
(1) MEASUREMENT OF TAXABLE INCOME UNDER ISRAEL'S INCOME
TAX (INFLATIONARY ADJUSTMENTS) LAW, 1985:
Results for tax purposes for the Company and certain
of its Israeli subsidiaries are measured and
reflected in accordance with the change in the
Israeli Consumer Price Index ("CPI"). As explained
above in Note 2(B), the consolidated financial
statements are presented in U.S. dollars. The
differences between the change in the Israeli CPI and
in the NIS/U.S. dollar exchange rate cause a
difference between taxable income and the income
before taxes reflected in the consolidated financial
statements.
In accordance with paragraph 9(f) of SFAS No. 109,
the Company has not provided deferred income taxes on
the above differences resulting from changes in
exchange rates and indexing for tax purposes.
(2) TAX BENEFITS UNDER ISRAEL'S LAW FOR THE ENCOURAGEMENT
OF INDUSTRY (TAXES), 1969:
The Company and certain subsidiaries in Israel
(mainly El-Op and Cyclone Aviation Products Ltd.) are
"Industrial Companies", as defined by the Law for the
Encouragement of Industry (Taxes), 1969, and as such,
these companies are entitled to certain tax benefits,
mainly amortization of costs relating to know-how and
patents over eight years, accelerated depreciation
and the right to deduct public issuance expenses for
tax purposes.
(3) TAX BENEFITS UNDER ISRAEL'S LAW FOR THE ENCOURAGEMENT
OF CAPITAL INVESTMENTS, 1969:
Several expansion programs of the Company and certain
of its Israeli subsidiaries ("the companies") have
been granted "Approved Enterprise" status under
Israel's Law for the Encouragement of Capital
Investments, 1959. For some expansion programs, the
companies have elected the grants track and for
others they have elected the alternative tax benefits
track, waiving grants in return for tax exemptions.
45
ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
--------------------------------------------------------------------------------
U.S. dollars (In thousands)
NOTE 16 - TAXES ON INCOME (CONT.)
(3) TAX BENEFITS UNDER ISRAEL'S LAW FOR THE ENCOURAGEMENT
OF CAPITAL INVESTMENTS, 1969 (CONT.):
Accordingly, certain income of the companies, derived
from the "Approved Enterprise" expansion programs is
tax exempt for two-years and subject to reduced tax
rates of 25% for a five-year to eight-year period or
tax exempt for a ten-year period commencing in the
year in which the companies had taxable income
(limited to twelve years from commencement of
production or fourteen years from the date of
approval, whichever is earlier). As of December 31,
2005, the tax benefits for these exiting expansion
programs will expire within the period of 2006 to
2012.
The entitlement to the above benefits is subject to
the companies fulfilling the conditions specified in
the above referred law, regulations published
hereunder and the letters of approval for the
specific investments in "Approved Enterprises". In
the event of failure to comply with these conditions,
the benefits may be canceled and the companies may be
required to refund the amount of the benefits, in
whole or in part, including interest. (For liens -
see Note 17(J)). As of December 31, 2005, Management
believes that the companies are meeting all
conditions of the approvals.
As of December 31, 2005, retained earnings included
approximately $126,400 in tax-exempt profits earned
by the companies' "Approved Enterprises". If the
retained tax-exempt income is distributed, it would
be taxed at the corporate tax rate applicable to such
profits as if the Company had not elected the
alternative tax benefits track (currently - 25%), and
an income tax liability would be incurred of
approximately $31,600 as of December 31, 2005.
The companies' boards of directors have decided that
their policy is not to declare dividends out of such
tax-exempt income. Accordingly, no deferred income
taxes have been provided on income attributable to
the companies' "Approved Enterprises", as such
retained earnings are essentially permanent in
duration.
In Israel, income from sources other than the
"Approved Enterprise" during the benefit period will
be subject to tax at the regular corporate tax rate
of 34% (see also Note 16(H)).
Since the companies are operating under more than one
approval, and since part of their taxable income is
not entitled to tax benefits under the above
mentioned law and is taxed at the regular tax rate of
34%, the effective tax rate is the result of a
weighted combination of the various applicable rates
and tax exemptions, and the computation is made for
income derived from each approval on the basis of
formulas specified in the law and in the approvals.
46
ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
--------------------------------------------------------------------------------
U.S. dollars (In thousands)
NOTE 16 - TAXES ON INCOME (CONT.)
B. NON - ISRAELI SUBSIDIARIES
Non-Israeli subsidiaries are taxed based on tax laws in their
countries of residence (mainly in the U.S.).
C. INCOME BEFORE TAXES ON INCOME
YEAR ENDED DECEMBER 31,
-------------------------------
2005 2004 2003
------- ------- -------
Income before taxes on income:
Domestic $27,391 $43,642 $38,423
Foreign 23,125 16,985 11,090
------- ------- -------
$50,516 $60,627 $49,513
======= ======= =======
D. TAXES ON INCOME
YEAR ENDED DECEMBER 31,
-----------------------------------
2005 2004 2003
-------- -------- --------
Taxes on income:
Current taxes:
Domestic $ 5,161 $ 7,415 $ 12,346
Foreign 4,506 7,651 718
-------- -------- --------
9,667 15,066 $ 13,064
-------- -------- --------
Deferred income taxes:
Domestic 4,029 709 (4,672)
Foreign 2,639 (556) 2,942
-------- -------- --------
6,668 153 (1,730)
-------- -------- --------
$ 16,335 $ 15,219 $ 11,334
======== ======== ========
47
ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
--------------------------------------------------------------------------------
U.S. dollars (In thousands)
NOTE 16 - INCOME TAXES (CONT.)
E. DEFERRED INCOME TAXES
Deferred income taxes reflect the net tax effect of temporary
differences between the carrying amount of assets and
liabilities for financial reporting purposes and the amounts
used for income tax purposes. Significant components of net
deferred tax assets and liabilities are as follows:
DEFERRED (1)
TAX ASSET (LIABILITY)
----------------------
TOTAL CURRENT NON-CURRENT
-------- -------- --------
As of December 31, 2005
Deferred tax assets:
Reserves and allowances $ 20,150 $ 15,520 $ 4,630
Inventory 8,059 8,059 -
Intangible assets 562 562 -
Net operating loss carryforwards 10,233 134 10,099
-------- -------- --------
39,004 24,275 14,729
Valuation allowance (18,774) (5,567) (13,207)
-------- -------- --------
Net deferred tax assets 20,230 18,708 1,522
-------- -------- --------
Deferred tax liabilities:
Reserves and allowances 1,480 3,295 (1,815)
Inventory (5,435) (5,435) -
Property, plant and equipment (15,842) - (15,842)
Intangible assets (16,330) - (16,330)
-------- -------- --------
(36,127) (2,140) (33,987)
Valuation allowance 1,041 - 1,041
-------- -------- --------
(35,086) (2,140) (32,946)
-------- -------- --------
Net deferred tax assets (liabilities) $(14,856) $ 16,568 $(31,424)
======== ======== ========
As of December 31, 2004
Deferred tax assets:
Reserves and allowances $ 12,797 $ 13,191 $ (394)
Inventory 5,376 5,376 -
Intangible assets 2,639 2,639 -
Net operating loss carryforwards 5,395 149 5,246
-------- -------- --------
26,207 21,355 4,852
Valuation allowance (3,445) - (3,445)
-------- -------- --------
Net deferred tax assets 22,762 21,355 1,407
-------- -------- --------
Deferred tax liabilities:
Property, plant and equipment (12,999) - (12,999)
Intangible assets (12,924) - (12,924)
-------- -------- --------
(25,923) - (25,923)
-------- -------- --------
Net deferred tax assets (liabilities) $ (3,161) $ 21,355 $(24,516)
======== ======== ========
(1) The current tax asset is included in other
receivables. Noncurrent tax liability is included as a
long-term liability.
48
ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
--------------------------------------------------------------------------------
U.S. dollars (In thousands)
NOTE 16 - INCOME TAXES (CONT.)
F. As of December 31, 2005, The Group's Israeli subsidiaries have
estimated total available carryforward tax losses of
approximately $30,100, and the Group's non-Israeli
subsidiaries have estimated available carryforward tax losses
of approximately $7,400. These losses can be offset against
future taxable profits for an indefinite period. Deferred tax
assets in respect of the above carryforward losses amount to
approximately $1,700 in respect of which a valuation allowance
has been recorded in the amount of approximately $8,600.
G. Reconciliation of the theoretical tax expense, assuming all
income is taxed at the statutory rate applicable to income of
the Group, and the actual tax expense as reported in the
statements of operations, is as follows:
YEAR ENDED DECEMBER 31,
--------------------------------------
2005 2004 2003
-------- -------- --------
Income before taxes as reported in the
consolidated statements of operations $ 50,516 $ 60,627 $ 49,513
Statutory tax rate 34% 35% 36%
======== ======== ========
Theoretical tax expense $ 17,175 $ 21,219 $ 17,825
Tax benefit arising from reduced rate as an
"Approved Enterprise" and other tax
benefits (4,515) (7,196) (8,391)
Tax adjustment in respect of different tax
rates for foreign subsidiaries 654 496 279
Operating carryforward losses for which valuation
allowance was provided (818) (434) 126
Increase (decrease) in taxes resulting
from nondeductible expenses 1,309 1,095 993
Difference in basis of measurement for financial
reporting and tax return purposes 2,547 (210) 846
Taxes in respect of prior years - -
Other differences, net (17) 248 (344)
-------- -------- --------
Actual tax expenses $ 16,335 $ 15,219 $ 11,334
======== ======== ========
Effective tax rate 32.3% 25.1% 22.9%
======== ======== ========
H. AMENDMENT TO THE INCOME TAX ORDINANCE
On July 25, 2005, the Knesset (Israeli Parliament) approved
the Law for the Amendment of the Income Tax Ordinance (No.
147), 2005, which prescribes, among other provisions, a
gradual decrease in the corporate tax rate in Israel to the
following tax rates: in 2006 - 31%, in 2007 - 29%, in 2008 -
27%, in 2009 - 26% and in 2010 and thereafter - 25%. The
change in the future tax rates, did not have a material effect
on the Company's financial position and results of operations
in 2005.
49
ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
--------------------------------------------------------------------------------
U.S. dollars (In thousands)
NOTE 17 - COMMITMENTS AND CONTINGENT LIABILITIES
A. ROYALTY COMMITMENTS
1. The Company and certain Israeli subsidiaries
partially finance their research and development
expenditures under programs sponsored by the OCS for
the support of research and development activities
conducted in Israel. At the time the participations
were received, successful development of the related
projects was not assured.
In exchange for participation in the programs by the
OCS, the Company and the subsidiaries agreed to pay
2% - 5% of total sales of products developed within
the framework of these programs. The royalties will
be paid up to a maximum amount equaling 100% to 150%
of the grants provided by the OCS, linked to the
dollar and for grants received after January 1, 1999,
also bearing annual interest at a rate based on
LIBOR. The obligation to pay these royalties is
contingent on actual sales of the products, and in
the absence of such sales payment of royalties is not
required.
In some cases, the Government of Israel participation
(through the OCS) is subject to export sales or other
conditions. The maximum amount of royalties is
increased in the event of production outside of
Israel.
The Company and certain of its subsidiaries may also
be obligated to pay certain amounts to the Israeli
Ministry of Defense and others on certain sales
including sales resulting from the development of
certain technologies.
Royalties expensed amounted to $4,849, $5,423 and
$7,812 in 2005, 2004 and 2003, respectively.
2. In September 2001, the OCS issued "Regulations for
the Encouragement of Research and Development in
Industry" (rules for determining the level and
payment of royalties) (the "regulations"). The
regulations allow large R&D intensive companies to
reach certain agreements with the OCS regarding
determination of the amount and payment schedule of
royalties, subject to certain conditions.
If the Company elects to adopt the regulations, it
will have to record a significant one-time expense
resulting from accruing a liability for an absolute
amount of royalties.
In 2002, El-Op's Board of Directors approved an
arrangement, proposed by the OCS, according to which
El-Op pays commencing in 2002, an agreed amount of
$10,632 in exchange for a release from all
obligations to pay royalties in the future. As a
result, El-Op recorded an expense for the agreed
amount net of the accrual for royalties previously
recorded by El-Op in the amount of $9,801. This
expense is included cost of revenues.
50
ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
--------------------------------------------------------------------------------
U.S. dollars (In thousands)
NOTE 17 - COMMITMENTS AND CONTINGENT LIABILITIES (CONT.)
B. COMMITMENTS IN RESPECT OF LONG-TERM PROJECTS
In connection with long-term projects in certain countries,
the Company and certain subsidiaries undertook to use their
respective best efforts to make or facilitate purchases or
investments in those countries at certain percentages of the
amount of the projects. The companies' obligation to make or
facilitate third parties making such investments and purchases
is subject to commercial conditions in the local market,
typically without a specific financial penalty. The maximum
aggregate undertaking as of December 31, 2005 amounted to
$682,000 to be performed over a period of up to 10 years. This
amount is typically tied to a percentage (up to 100%) of the
amount of a specific contract.
In the opinion of the Company's Management, the actual amount
of the investments and purchases is anticipated to be less
than that mentioned above, since certain investments and
purchases can result in reducing the overall undertaking on
more than a one-to-one basis.
C. LEGAL CLAIMS
The Company and its subsidiaries are involved in legal claims
arising in the ordinary course of business, including claims
by employees, consultants and others. Company's Management,
based on the opinion of its legal counsel, believes that the
financial impact for the settlement of such claims in excess
of the accruals recorded in the financial statements will not
have a material adverse effect on the financial position or
results of operations of the Group.
For information on Elisra's insurance claim for damage, as a
result of a fire in 2001, see Note 7.
D. LEASE COMMITMENTS
The future minimum lease commitments of the Group under
various non-cancelable operating lease agreements in respect
of premises, motor vehicles and office equipment are as of
December 31, 2005 as follows:
2006 $ 13,081
2007 10,348
2008 8,607
2009 8,047
2010 and thereafter 17,596
------------
$ 57,679
============
Rent expenses for the years ended December 31, 2005, 2004 and
2003 amounted to $ 8,055, $6,842 and $9,177, respectively.
51
ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
--------------------------------------------------------------------------------
U.S. dollars (In thousands)
NOTE 17 - COMMITMENTS AND CONTINGENT LIABILITIES (CONT.)
E. PUT OPTION
Three founding employees (the "Founders"), who collectively
hold approximately 32.3% of the outstanding shares of Kinetics
Ltd. ("Kinetics"), a 51%-owned Israeli subsidiary, had a put
option to jointly sell all of their shares in Kinetics to the
Company. Two private investors holding in the aggregate
approximately 16.7% of Kinetics' outstanding shares had "tag
along" rights in the event the Founders exercise the put
option.
The put option was exercisable from January 1, 2005 until
December 31, 2005 at a price equal to the higher of the
Founder's pro-rata share (corresponding to the Founder's
shareholding percentage) of:
(1) The value of Kinetics as of the option exercise date
as determined by a third party appraiser mutually
acceptable to the Founders and to the Company. The
appraiser was to value Kinetics as if Kinetics had
distributed as dividends net profits accumulated up
to the option exercise date; or
(2) $12,077, reduced by 3% per annum, or pro-rata part
thereof, for the period beginning on July 1, 2003 and
ending on the option exercise date.
The aforementioned option expired as of December 31, 2005.
F. GUARANTEES
1. As of December 31, 2005, guarantees in the amount of
approximately $667,000 were issued by banks on behalf
of Group companies in order to secure certain
advances from customers and performance bonds.
2. The Company has provided, on a proportional basis to
its ownership interest, guarantees for three of its
investees in respect of credit lines granted to them
from banks amounting to $13,300 (2004 - $12,000), of
which $12,500 (2004 - $11,500) relates to a 50%-owned
foreign investee. The guarantees will exist as long
as the credit lines are in effect. The Company would
be liable under the guarantee for any debt for which
the investee would be in default under the terms of
the credit line. The fair value of such guarantees as
of December 31, 2005 is not material.
G. COVENANTS
In connection with bank credits and loans, including
performance guarantees issued by banks and bank guarantees in
order to secure certain advances from customers, the Company
and certain subsidiaries are obligated to meet certain
financial covenants. Such covenants include requirements for
shareholders' equity, current ratio, operating profit margin,
tangible net worth, EBITDA, interest coverage ratio and total
leverage. As of December 31, 2005, the Company and its
subsidiaries except Elisra were in full compliance with all
covenants.
52
ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
--------------------------------------------------------------------------------
U.S. dollars (In thousands)
NOTE 17 - COMMITMENTS AND CONTINGENT LIABILITIES (CONT.)
G. COVENANTS (Cont.)
As at December 31, 2005, Elisra did not comply with some of
the above-mentioned financial covenants. Nonetheless,
subsequent to the balance sheet date, a letter was received
from one of the banks, waving its demand for repayment of the
loan for a period of 15 months from the balance sheet date. In
addition, a letter was also received from the other bank that
retroactively updates the financial covenants as at December
31, 2005 (based on the actual ratios at that time) and also
provides updated financial covenants for the coming years. The
bank will examine these updated financial covenants on
December 31, 2006, and in Management's estimation Elisra will
comply with those covenants at that date. Accordingly, loans,
in the amount of $10 million, are classified as long-term
loans.
H. CONTRACTUAL OBLIGATIONS
Substantially all of the purchase commitments relate to
obligations under purchase orders and subcontracts entered
into by the Company. These purchase orders and subcontracts
are typically in a standard format proposed by the Company,
with the subcontracts and purchase orders also reflecting
provisions from the Company's applicable prime contract that
are appropriate to flow down to subcontractors and vendors.
The terms typically included in these purchase orders and
subcontracts are consistent with Uniform Commercial Code
provisions in the United States for sales of goods, as well as
with specific terms called for by its customers in
international contracts. These terms include the Company's
right to terminate the purchase order or subcontract in the
event of the vendor's or subcontractor's default, as well as
the Company's right to terminate the order or subcontract for
the Company's convenience (or if the Company's prime
contractor has so terminated the prime contract). Such
purchase orders and subcontracts typically are not subject to
variable price provisions. As of December 31, 2005 and 2004
the purchase commitments were $661,000 and $345,000
respectively.
I. In order to secure bank loans and bank guarantees in the
amount of $8,600 as of December 31, 2005, certain Group
companies recorded fixed liens on most of their machinery and
equipment, mortgages on most of their real estate and floating
charges on most of their assets.
J. A lien on the Group's Approved Enterprises has been registered
in favor of the State of Israel (see Note 16(A)(3) above).
NOTE 18 - SHAREHOLDER'S EQUITY
A. SHARE CAPITAL
Ordinary shares confer upon their holders voting rights, the
right to receive dividends and the right to share in equity
upon liquidation of the Company.
53
ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
--------------------------------------------------------------------------------
U.S. dollars (In thousands, except share and per share data)
NOTE 18 - SHAREHOLDER'S EQUITY (CONT.)
B. 2000 EMPLOYEE STOCK OPTION PLAN
In 2000, the Company adopted an employee stock option plan for
employees comprising options to purchase up to 2,500,000
ordinary shares. The exercise price approximates the market
price of the shares at the grant date. The plan includes an
additional 2,500,000 options to be issued as "phantom" share
options that grant the option holders a number of shares
reflecting the benefit component of the options exercised, as
calculated at the exercise date, in consideration for their
par value only. Options vest over a period of one to four
years from the date of grant and expire no later than six
years from the date of grant.
Any options which are canceled or forfeited before expiration
become available for future grants. As of December 31, 2005,
405,794 options of the Company were still available for future
grants.
C. "PHANTOM" SHARE OPTIONS
Until January 1, 2004, the Company applied the provision of
APB No. 25, under which the phantom share options were
considered to be part a variable awards as defined in APB No.
25, and accordingly the compensation cost of the options was
measured at the end of each reporting period and amortized by
the accelerated method over the remaining vesting period.
Starting January 1, 2004, the Company accounts for its stock
based compensation awards under the fair value based method.
D. A summary of the Company's share option activity under the
plans is as follows:
2005 2004 2003
---------------------------- ---------------------------- ---------------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
NUMBER OF EXERCISE NUMBER OF EXERCISE NUMBER OF EXERCISE
OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE
----------- ---------- ------------ ------------ ----------- -----------
Outstanding -
beginning of the year 2,130,257 $ 12.60 3,735,602 $ 12.30 4,511,724 $ 12.26
Granted 22,000 $ 19.36 130,500 15.67 13,000 14.91
Exercised (549,505) $ 12.38 (1,666,774) 12.12 (757,947) 12.13
Forfeited - - (69,071) 12.10 (31,175) 12.29
----------- ---------- ------------ ------------ ----------- -----------
Outstanding -
end of the year 1,602,752 $ 12.83 2,130,257 $ 12.60 3,735,602 $ 12.30
=========== ========== ============ ============ =========== ===========
Options exercisable at
the end of the year 1,470,752 $ 12.47 1,950,903 $ 12.36 2,547,196 $ 12.23
=========== ========== ============ ============ =========== ===========
54
ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
--------------------------------------------------------------------------------
U.S. dollars (In thousands, except share and per share data)
NOTE 18 - SHAREHOLDER'S EQUITY (CONT.)
E. The options outstanding as of December 31, 2005, have been
separated into ranges of exercise prices, as follows:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------------- -----------------------------
NUMBER WEIGHTED WEIGHTED
OUTSTANDING AVERAGE WEIGHTED NUMBER AVERAGE
AS OF REMAINING AVERAGE OUTSTANDING AS EXERCISE
DECEMBER 31, CONTRACTUAL EXERCISE OF DECEMBER PRICE PER
EXERCISE PRICE 2005 LIFE (YEARS) PRICE PER SHARE 31, 2005 SHARE
-------------- ------------ ------------ --------------- -------------- -----------
$12.18 - $19.36 1,602,752 $ 1.34 $ 12.83 1,470,752 $ 12.47
Compensation expense (income) amounting to $172, $3,387 and
$4,741 was recognized during the years ended December 31,
2005, 2004 and 2003, respectively. All the compensation
expenses stet in the year 2003 were related to the phantom
share options under the stock option plan. The expenses in
2004 were recorded based on SFAS No. 123 and SFAS No. 148
according to the modified prospective method. The expenses
(income) were recorded as follows:
YEAR ENDED DECEMBER 31,
------------------------------------------------------
2005 2004 2003
----------------- -------------------- ---------------
Cost of revenues $ 96 $ 1,863 $ 2,608
R&D and marketing expenses 34 677 948
General and administration expenses 42 847 1,185
------------ ------------ ------------
$ 172 $ 3,387 $ 4,741
============ ============ ============
F. The weighted average exercise price and fair value of options
granted during the years ended December 31, 2005, 2004 and
2003 were:
LESS THAN MARKET PRICE
------------------------------------------------------
YEAR ENDED DECEMBER 31,
------------------------------------------------------
2005 2004 2003
----------------- -------------------- ---------------
Weighted average exercise price $ 19.36 $ 15.67 $ 14.91
Weighted average fair value on
grant date $ 6.47 $ 6.62 $ 4.63
55
ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
--------------------------------------------------------------------------------
U.S. dollars (In thousands, except share and per share data)
NOTE 18 - SHAREHOLDER'S EQUITY (CONT.)
G. Computation of basic and diluted net earnings per share:
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, 2005 DECEMBER 31, 2004 DECEMBER 31, 2003
-------------------------------------- ------------------------------------- ------------------------------------
NET INCOME
NET INCOME TO WEIGHTED TO WEIGHTED NET INCOME TO WEIGHTED
SHAREHOLDERS AVERAGED SHAREHOLDERS AVERAGED SHAREHOLDERS AVERAGED PER
OF ORDINARY NUMBER OF PER SHARE OF ORDINARY NUMBER OF PER SHARE OF ORDINARY NUMBER OF SHARE
SHARES SHARES (*) AMOUNT SHARES SHARES (*) AMOUNT SHARES SHARES (*) AMOUNT
-----------------------------------------------------------------------------------------------------------------
Basic net earnings $ 32,487 40,750 $0.80 $ 51,873 39,952 $1.30 $ 45,945 39,061 $1.18
Effect of dilutive
securities:
Employee stock
options - 873 - 1,089 - 1,169
----------- ----- ---------- ------ -------- ------
Diluted net earnings $ 32,487 41,623 $0.78 $ 51,873 41,041 $1.26 $ 45,945 40,230 $1.14
=========== ====== ===== ========== ====== ===== ======== ====== =====
* In thousands
H. TREASURY SHARES
The Company's shares held by the Company and its subsidiaries
are presented at cost and deducted from shareholders' equity.
I. DIVIDEND POLICY
Dividends declared by the Company are paid subject to
statutory limitations. The Company's board of directors has
determined not to declare dividends out of tax exempt
earnings.
56
ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
--------------------------------------------------------------------------------
U.S. dollars (In thousands)
NOTE 19 - MAJOR CUSTOMER AND GEOGRAPHIC INFORMATION
The Group applies Statement of Financial Accounting Standards No. 131,
"Disclosures about Segments of an Enterprise and Related Information"
("SFAS No. 131"). The Group operates in one reportable segment (see
Note 1 for a brief description of the Group's business).
A. Revenues are attributed to geographic areas based on location
of the end customers as follows:
Year ended December 31,
------------------------------------------------------
2005 2004 2003
------------------ ------------------- ---------------
Europe $ 104,239 $ 124,130 $ 109,409
U.S. 397,479 348,509 332,323
Israel 315,376 241,601 255,742
Others 252,782 225,685 200,506
------------------ ------------------- ---------------
$ 1,069,876 $ 939,925 $ 897,980
================== =================== ===============
B. Revenues are generated by the following product lines:
YEAR ENDED DECEMBER 31,
-----------------------------------------------------
2005 2004 2003
----------------- ------------------- --------------
Airborne systems $ 420,815 $ 367,927 $ 373,580
Land vehicles systems 117,358 199,224 199,800
Command, control, communications,
computers, intelligence, surveillance and
reconnaissance systems (C(4)ISR) 217,343 108,925 133,900
Electro-optical systems 242,274 200,322 140,500
Others 72,086 63,527 50,200
----------------- ------------------- --------------
$ 1,069,876 $ 939,925 $ 897,980
================= =================== ===============
C. Revenues from single customers, which exceed 10% of total
revenues in the reported years:
YEAR ENDED DECEMBER 31,
------------------------------------------------------
2005 2004 2003
------------------ ------------------- ---------------
IMOD 26% 18% 21%
U.S. Government 10% 10% *
*Less than 10%
D. Long-lived assets by geographic areas:
YEAR ENDED DECEMBER 31,
------------------------------------------------------
2005 2004 2003
------------------ ------------------- ---------------
Israel $ 322,521 $ 237,887 $ 229,396
U.S. 87,998 84,701 81,261
Others 17,206 17,687 18,576
------------------ ------------------- ---------------
$ 427,725 $ 340,275 $ 329,233
================== =================== ===============
57
ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
--------------------------------------------------------------------------------
U.S. dollars (In thousands)
NOTE 20 - RESEARCH AND DEVELOPMENT EXPENSES, NET
YEAR ENDED DECEMBER 31,
--------------------------------------------------
2005 2004 2003
------------------ ------------------- -----------
Total expenses $ 92,375 $ 86,368 $ 65,487
Less - participations (20,472) (19,522) (10,568)
------------------ ---------------- --------------
$ 71,903 $ 66,846 $ 54,919
================== =============== ==============
NOTE 21 - FINANCIAL EXPENSES, NET
YEAR ENDED DECEMBER 31,
------------------------------------------------------
2005 2004 2003
------------------ ---------------- ------------------
Expenses:
On long-term bank debt $ (6,359) $ (1,544) $ (2,215)
On short-term bank credit and loans (3,433) (2,309) (2,182)
Others (5,147) (3,181) (3,905)
------------------ ---------------- ------------------
(14,939) (7,034) (8,302)
------------------ ---------------- ------------------
Income:
Interest on cash, cash equivalents
and bank deposits 2,205 628 309
Others - 1,115 4,397
------------------ ---------------- ------------------
2,205 1,743 4,706
------------------ ---------------- ------------------
Gain (loss) from exchange rate
differences 1,262 (561) (1,274)
------------------ ---------------- ------------------
$ (11,472) $ (5,852) $ (4,870)
================= ================= ==================
NOTE 22 - RELATED PARTIES TRANSACTIONS AND BALANCES
YEAR ENDED DECEMBER 31,
------------------------------------------------------
2005 2004 2003
------------------ ---------------- ------------------
Income -
Sales to affiliated companies (*) $ 63,007 $ 56,346 $ 34,674
Participation in expenses $ 3,630 $ 2,594 $ 1,773
Cost and expenses -
Supplies and services from affiliated
companies (**) $ 19,031 $ 16,338 $ 21,606
Participation in expenses $ 91 $ 627 $ 1,751
Financial expenses - $ 3 $ 23
DECEMBER 31,
---------------------------------
2005 2004
---------------------------------
Trade receivables and other receivables (*) $ 4,914 $ 13,214
Trade payables (**) $ 2,574 $ 5,445
58
ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
--------------------------------------------------------------------------------
U.S. dollars (In thousands)
NOTE 22 - RELATED PARTIES TRANSACTIONS AND BALANCES (CONT.)
The purchases from our related parties are made at prices and on terms
equivalent to those used in transacting business with unrelated parties
under similar conditions. The sales to our related parties in respect
with government defense contracts are made on the basis of costs
incurred.
(*) The significant sales include sales of helmet mounted cueing
systems purchased from the Company by VSI.
(**) Includes electro-optics components and sensors, purchased by
the Company from SCD, and electro-optics products purchased by
the Company from Opgal.
NOTE 23 - RECONCILIATION TO ISRAELI GAAP
As described in Note 2, the Company prepares its financial statements
in accordance with U.S. GAAP. The effects of the differences between
U.S. GAAP and generally accepted accounting principles in Israel
("Israeli GAAP") on the Company's financial statements are detailed
below.
A building purchased from Elbit Ltd.
------------------------------------
According to Israeli GAAP, the Company charged to additional paid-in
capital reserves the excess of the amount paid over net book value of a
building acquired from Elbit Ltd in 1999. According to U.S. GAAP, the
entire amount paid is considered as the cost of the building acquired.
Proportional consolidation method
---------------------------------
According to Israeli GAAP, a jointly controlled company should be
included according to the proportional consolidation method. According
to U.S. GAAP, the investment in such a company is recorded according to
the equity method.
Tax benefit in respect of options exercised
-------------------------------------------
According to Israeli GAAP, tax benefits from employee options exercised
are recorded as a reduction of tax expense. According to U.S. GAAP, the
difference between the above mentioned tax benefits and the benefits
recorded in respect of compensation expense in the financial statements
are credited to additional paid-in capital.
Goodwill
--------
Effective January 1, 2002, the Company adopted SFAS 142, "Goodwill and
Other Intangible Assets" according to which goodwill and intangible
assets with indefinite lives are no longer amortized periodically but
are reviewed annually for impairment (or more frequently if impairment
indicators arise). According to Israeli GAAP, all intangibles,
including goodwill, should be amortized.
59
ELBIT SYSTEMS LTD. AND ITS SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
--------------------------------------------------------------------------------
U.S. dollars (In thousands)
NOTE 23 - RECONCILIATION TO ISRAELI GAAP (CONT.)
Investment in marketable securities - Tadiran
---------------------------------------------
Pursuant to SFAS 115, marketable securities which are
available-for-sale are presented on the basis of their market value,
and changes in such value are charged (or credited) to other
comprehensive income. According to Israeli GAAP non-current investments
in marketable securities are presented at cost
1. EFFECT ON NET INCOME AND EARNINGS PER SHARE
YEAR ENDED DECEMBER 31,
--------------------------------------------------------
2005 2004 2003
------------------ ------------------ ------------------
Net income as reported according to
U.S. GAAP $ 32,487 $ 51,873 $ 45,945
Adjustments to Israeli GAAP (9,637) (458) 595
------------------ ------------------ ------------------
Net income according to Israeli GAAP $ 22,850 $ 51,415 $ 46,540
================== ================== ==================
2. EFFECT ON SHAREHOLDERS' EQUITY
AS PER ISRAELI
AS REPORTED ADJUSTMENTS GAAP
------------------ ------------------ ------------------
AS OF DECEMBER 31, 2005
Shareholders' equity $ 450,777 $ (19,279) $ 431,498
================== ================== ==================
AS OF DECEMBER 31, 2004
Shareholders' equity $ 432,184 $ (13,124) $ 419,060
================== ================== ==================
# # # # # # # #
60